Chapter 19 Quizzes

In connection with the element of engagement performance, a CPA firm's system of quality control should ordinarily include procedures covering all of the following except A. Performance evaluation. B. Engagement performance. C. Supervision responsibilities. D. Review responsibilities.

A. Performance evaluation. "Performance evaluations" are not listed as part of th AICPA's SQCS #8. This term more typically is used to describe judging the performance of individuals within the firm and not for quality control of overall engagement performance.

In which of the following situations would a CPA's independence be considered impaired according to the Code of Professional Conduct? 1. The CPA has a car loan from a bank that is an audit entity. The loan was made under the same terms available to all customers. 2. The CPA has a direct financial interest in an audit entity, but the interest is maintained in a blind trust. 3. The CPA owns a commercial building and leases it to an audit entity. The rental income is material to the CPA.

2. The CPA has a direct financial interest in an audit entity, but the interest is maintained in a blind trust. 3. The CPA owns a commercial building and leases it to an audit entity. The rental income is material to the CPA. The direct financial interest in an audit client and the material business relationship with an audit client impair the CPA's independence. Automobile loans from financial institution clients are allowed if made under the same terms as avaiable to all of the financial institution's customers.

One of a CPA firm's basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through A. A system of quality control. B. A system of peer review. C. Continuing professional education. D. Compliance with generally accepted reporting standards.

A. A system of quality control. A CPA firm assures that its services conform with professional standards by implementing and maintaining an adequate system of quality control.

A violation of the profession's ethical standards is least likely to occur when a CPA A. Purchases another CPA's accounting practices and bases the price on a percentage of the fees accruing from clients over the three-year period. B. Receives a percentage of the amounts invested by the CPA's audit clients in a tax shelter with the clients' knowledge and approval. C. Has a public accounting practice and also is president and sole stockholder of a corporation that engages in data processing services for the public. The CPA often refers his attest entities to the data processing company. D. Forms an association - not a legally binding partnership - with two other sole practitioners and calls the association "Adams, Betts & Associates."

A. Purchases another CPA's accounting practices and bases the price on a percentage of the fees accruing from clients over the three-year period. Anticipated future fees are a legitimate way to value a service company and this arrangement does not violate any rules under the AICPA Code of Professional Conduct.

A violation of the AICPA Code of Professional Conduct's ethical standards is least likely to occur when a CPA A. purchases another CPA's accounting practice and bases the price on a percentage of the fees accruing from the clients over a three-year period. B. receives a percentage of the amounts invested by the CPA's audit clients in a tax shelter with the clients' knowledge and approval. C. has a public accounting practice and is the president and sole stockholder of a corporation that engages in data processing services for the public. The CPA often refers his clients to the data processing company. D. forms an association - not a legally binding partnership - with two other sole practitioners and calls the association "Adams, Betts & Associates."

A. purchases another CPA's accounting practice and bases the price on a percentage of the fees accruing from the clients over a three-year period. This is one appropriate way to value a CPA firm and there are no standards preventing this type of financial arrangement when purchasing another CPA's accounting practice.

A client company has not paid audit fees for its 2010 audit in which the audit report was dated March 15, 2011. According to the AICPA Code of Professional Conduct, for the auditor to be considered independent with respect to the 2011 audit, the 2010 audit fees must be paid before the A. 2010 report is issued. B. 2011 report is issued. C. 2012 fieldwork is started. D. 2011 fieldwork is started.

B. 2011 report is issued. Ethics ruling on independence, integrity, and objectivity number 52 states that when the report on the current year audit (2011 audit) is issued if fees are still owed for work provided more than one year prior to the date of the current audit report (2011 audit report) the independence of the CPA is impaired.

Assume that a CPA firm audits Snow-Town, Inc. Which of the following individuals is least likely to be considered a covered member as that term is used in the interpretations of the AICPA Code of Professional Conduct? A. An auditor who is a staff accountant assigned to perform basic and routine audit functions on the Snow-Town, Inc. audit but has no managerial responsibilities in the audit firm. B. An auditor who is a partner working out of a distant office of the firm who has provided five hours of consulting services to the client on a one-time engagement. C. An auditor who is a partner in a distant office of the firm, does not participate in the Snow-Town, Inc. audit, but is assigned to perform the annual performance evaluations of the lead engagement partner. D. An auditor who is a partner in the office in which the lead attest engagement partner primarily practices but is not assigned to the Snow-Town, Inc. audit engagement.

B. An auditor who is a partner working out of a distant office of the firm who has provided five hours of consulting services to the client on a one-time engagement. This partner is not in a position to influence the audit engagement and has provided less than ten hours of consulting services and thus would not be considered a covered member.

Without the consent of the entity, a CPA should not disclose confidential entity information contained in working papers to a(n) A. Authorized quality control review board. B. CPA firm that has been engaged to audit a former audit entity. C. Federal court that has issued a valid subpoena. D. Disciplinary body created under state statute.

B. CPA firm that has been engaged to audit a former audit entity. The successor CPA firm must have permission from the audit client to discuss confidential information with the predecessor auditor.

A privately held audit client has retained the auditor who performs the annual audit of the client's financial statements to assist with the implementation of a new computer system. Which of the following services provided by the auditor most likely would impair independence under the AICPA Code of Professional Conduct? A. Advising the client on qualifications of personnel hired operate the new system. B. Performing a search for and hiring new personnel to operate the new computer system. C. Counseling with the client on potential expansion of the business. D. Training personnel in the operation of the new computer system.

B. Performing a search for and hiring new personnel to operate the new computer system. Performing a search for and hiring new personnel is a management function and thus impairs the auditor's independence. Note that the other answers primarily involved giving assistance to the client in carrying out their management functions but did not involve direct supervision of employees or making decisions for the client.

During the audit of Moon Co., the auditor disagrees with management's estimation of collectible accounts receivable. The possible misstatement amount is material. Which of the statements below should weigh more heavily for the auditor in this instance? A. Moon management has the right to make company estimates. B. Requiring an adjustment to the allowance for doubtful accounts would give stockholders access to fair and adequate information. C. Accounts Receivable as stated by Moon Co., might turn out to be fully collectible. D. The interests of Moon Co., the auditor, and the public should be weighed equally in the decision.

B. Requiring an adjustment to the allowance for doubtful accounts would give stockholders access to fair and adequate information. The auditor's duty is to assess whether the financial statements present fairly. Thus, the auditor must recommend an adjustment and, if the proposed adjustment is not made, indicate a material misstatement of accounts receivable in her/his qualified audit opinion. Yes, it really is that simple.

The AICPA Code of Professional Conduct contains both general ethical principles that are aspirational in character and a A. List of violations that would cause the automatic suspension of a CPA's license. B. Set of specific, mandatory rules describing minimum levels of conduct a CPA must maintain. C. Description of a CPA's procedures for responding to an inquiry from a trial board. D. List of specific crimes that would be considered as acts discreditable to the profession.

B. Set of specific, mandatory rules describing minimum levels of conduct a CPA must maintain. The rules of conduct are part of the AICPA Code of Professional Conduct.

In order for a CPA firm to designate itself as "Members of the American Institute of Certified Public Accountants" A. the firm must be a registered member firm of the Institute and be current with all dues payments. B. all of its CPA owners must be members of the Institute. C. all of its CPA owners must be members of the Institute and the firm also must be a registered member firm of the Institute. D. all CPAs within the firm must be members of the Institute.

B. all of its CPA owners must be members of the Institute. Rule 505 makes this a requirement.

An audited entity company has not paid its 2013 audit fees. According to the AICPA Code of Professional Conduct, for the auditor to be considered independent with respect to the 2014 audit, the 2013 audit fees must be paid before the A. 2013 report is issued. B. 2014 fieldwork is started. C. 2014 report is issued. D. 2015 fieldwork is started.

C. 2014 report is issued. Ethical ruling #52, Unpaid Fees, states that independence is impaired if, by the date an audit report is issued, fees remain unpaid for services provided more than one year prior to the date of the audit report.

Rick, an independent CPA, must make an ethical judgment related to the audit of an entity. If he primarily focuses on whether his decision might yield unfair advantages for some at the expense of others, he is using A. A utilitarian perspective. B. A right-based approach. C. A justice-based perspective. D. Rule-based AICPA guidelines.

C. A justice-based perspective. The justice-based approach considers fairness and equity and attempts to equitably distribute resources. Rick's attempt to consider advantages to some at the expense of others most closely aligns with the justice approach.

Which of the following legal situations would be considered to impair the auditor's independence? A. An expressed intention by the present management to commence Litigation against the auditor, alleging deficiencies in audit work for the entity, although the auditor considers that there is only a remote possibility that such a claim will be filed. B. Actual litigation by the auditor against the entity for an amount not material to the auditor or to the financial statements of the entity arising out of disputes as to billings for management advisory services. C. Actual litigation by the auditor against the present management, alleging management fraud or deceit. D. Actual litigation by the entity against the auditor for an amount not material to the auditor or to the financial statements of the entity arising out of a dispute as to billings for tax services.

C. Actual litigation by the auditor against the present management, alleging management fraud or deceit. Actual litigation by the auditor against the present management, alleging management fraud or deceit.

Rule 101 of the AICPA Code of Professional Conduct (independence) considers which of the following situations a violation of the code? A. A partner in the New York office is married to the president of a client for which the firm's Connecticut office performs audit services. The New York partner does not perform services out of or for the Connecticut office, cannot exercise significant influence over the engagement, and has no involvement with the engagement. B. An audit partner holds an investment in a well-diversified mutual fund which sometimes makes immaterial investments in his audit clients. The auditor's investment in the mutual fund is not material to the auditor or the mutual fund. The auditor has no influence over investment decisions of the mutual fund. The auditor is a covered member. C. An audit partner has a brother who owns a 20% interest in an audit client, which is material to the brother's net worth. The partner participates in the audit engagement and is aware of his brother's investment. D. All of the possible answers are violations of Rule 101 of the AICPA Code of Professional Conduct.

C. An audit partner has a brother who owns a 20% interest in an audit client, which is material to the brother's net worth. The partner participates in the audit engagement and is aware of his brother's investment. Since the auditor's brother owns a material interest in an audit client and the auditor knows of the brother's investment independence is impaired.

Which of the following statements best explains why public accounting, as a profession, promulgates ethical standards and established means for ensuring their observance? A. Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts. B. Ethical standards that emphasize excellence in performance over material rewards establish individual reputations for competence and character. C. Ethical standards are established so that users of accounting services know what to expect and accounting professionals know what behaviors are acceptable, and so that discipline can be applied when necessary. D. A requirement for a profession is to establish ethical standards that primarily stress responsibility to clients and colleagues.

C. Ethical standards are established so that users of accounting services know what to expect and accounting professionals know what behaviors are acceptable, and so that discipline can be applied when necessary. This is the best explanation. The focus is on setting proper expectations in the minds of users of the CPAs professional services and includes enforcement.

Under the SEC's rules regarding independence, which of the following must a client disclose? A. Only fees for the external audit. B. Only fees for internal and external audit services provided by the audit firm. C. Fees for the external audit, audit-related feels, tax fees, and fees for other nonaudit services performed by the audit firm. D. Only fees for systems implementation and design, and nonaudit services performed by the audit firm.

C. Fees for the external audit, audit-related feels, tax fees, and fees for other nonaudit services performed by the audit firm. Fees for all of these services for audit clients must be disclosed.

Under the AICPA Code of Professional Conduct a CPA may express an unqualified opinion on financial statements that contain a material departure from promulgated GAAP A. when the auditor has a bona fide theoretical disagreement with an accounting standard promulgated by the FASB. B. when there are conflicting industry practices. C. if the auditor can demonstrate that due to unusual circumstances the financial statements would otherwise be misleading. D. under no circumstances.

C. if the auditor can demonstrate that due to unusual circumstances the financial statements would otherwise be misleading. The exception to Rule 203 allows an unqualified opinion to be issued under these circumstances and requires the auditor to mention the departure from GAAP in the audit report and note her or his concurrence with the departure.

The AICPA Code of Professional Conduct does not include enforceable conduct rules on which of the following? A. Commissions and referral fees. B. Accounting principles. C. Professional competence and due professional care. D. Responsibilities to colleagues.

D. Responsibilities to colleagues. Section 400, Responsibilities to Colleagues, still exists in the AICPA Code of Professional Conduct but there are no remaining rules in this section. At one time there were rules in this section but all of the rules have been deleted.

All of the following nonaudit services are identified by the SEC as generally impairing an auditor's independence except A. Information systems design and implementation. B. Human resource services. C. Management functions. D. Some specific tax services. E. All of the above are seen by the SEC as impairing independence.

D. Some specific tax services. While still a subject of debate, some specific tax services are allowed by the SECs rules.

In comparing the independence requirements of the AICPA with those of the SEC which of the following statements is the most accurate? A. The SEC has not issued any independence requirements, all independence requirements come from the AICPA. B. The independence requirements of the AICPA are more stringent than the independence requirements of the SEC. C. The independence requirements of the AICPA and the SEC are essentially the same. D. The independence requirements of the AICPA are less stringent than the independence requirements of the SEC.

D. The independence requirements of the AICPA are less stringent than the independence requirements of the SEC. The SEC has set more stringent independence requirements applying to audits of publicly held corporations traded on national exchanges. The less stringent independence requirements of the AICPA apply to all audits performed by AICPA members.

The most severe penalty which may be imposed against a CPA for violation of the AICPA Code of Professional Conduct is to A. dismember the CPA. B. suspend the member's license to practice as a CPA. C. fine the member and sanction them from performing future audits. D. revoke the CPA's membership in the AICPA.

D. revoke the CPA's membership in the AICPA. Revoking membership in the AICPA is the most severe penalty which can be imposed. Revoking membership permanently removes the member from the AICPA.