Chapter 2

Which of the following is a correct statement about the circumstances under which a CPA firm may or may not disclose the names of its clients without the clients' express permission? 1. A CPA firm may disclose this information unless disclosure would suggest that the client may be experiencing financial difficulties. 2. A CPA firm may disclose this information if the practice is limited to bankruptcy matters, so that prospective clients with similar concerns will be able to contact current clients. 3. A CPA firm may disclose this information if the practice is limited to performing asset valuations in anticipation of mergers and acquisitions. 4. A CPA firm may not disclose this information because the identity of its clients is confidential information.

1. A CPA firm may disclose this information unless disclosure would suggest that the client may be experiencing financial difficulties. Explanation: A member shall not disclose confidential client information without the client's consent unless it is disclosed to (1) comply with a valid subpoena or summons or with applicable laws and regulations, (2) discharge his or her professional obligations, (3) cooperate in an official review of his or her professional practice, or (4) initiate a complaint with or respond to any inquiry made by an appropriate investigative or disciplinary body. In a bankruptcy case, the implication that a client is in financial difficulty may make his or her name confidential information. If no exception applies, client confidentiality has been violated.

Which of the following violates the AICPA's Code of Professional Conduct? 1. A member shares offices with another member. Their joint letterhead implies that a partnership exists when each member is in fact practicing individually. 2. A member not in public practice is a bank controller who is designated as a CPA on bank stationery and in bank advertisements listing officers of the bank. 3. A member contracts with a service entity to maintain a client's computer hardware and charges the client a higher servicing fee than that charged to the member by the service provider. 4. A partner in a CPA firm is elected to public office. After her withdrawal from the firm, the remaining partners continue to use a firm name that includes her name.

1. A member shares offices with another member. Their joint letterhead implies that a partnership exists when each member is in fact practicing individually. Explanation: Two CPAs who are in fact not in partnership should not use a letterhead showing both names. Such a representation is misleading. Furthermore, some courts have held that such an arrangement may be a de facto partnership, and the individual CPAs may be liable for the obligations of the de facto partnership and of the de facto partners.

In which of the following situations is there a violation of client confidentiality under the AICPA Code of Professional Conduct? 1. A member whose practice is primarily bankruptcy discloses a client's name. 2. A member uses a records retention agency to store clients' records that contain confidential client information. 3. A member discloses confidential client information to a professional liability insurance carrier after learning of a potential claim against the member. 4. A member discloses confidential client information to a court in connection with arbitration proceedings relating to the client.

1. A member whose practice is primarily bankruptcy discloses a client's name. Explanation: A member shall not disclose confidential client information without the client's consent unless it is disclosed to (1) comply with a valid subpoena or summons or with applicable laws and regulations, (2) discharge his or her professional obligations, (3) cooperate in an official review of his or her professional practice, or (4) initiate a complaint with or respond to any inquiry made by an appropriate investigative or disciplinary body. In a bankruptcy case, the implication that a client is in financial difficulty may make his or her name confidential information. If no exception applies, client confidentiality has been violated.

Ann Covington, CPA, has been asked to perform a consulting services engagement concerning the analysis of a potential merger. She has little experience with the industry involved. What is her most appropriate action? 1. Accept the engagement and perform additional research or consult with others to obtain sufficient competence. 2. Decline the engagement because she lacks sufficient knowledge. 3. Accept the engagement and perform it in accordance with auditing standards. 4. Accept the engagement and issue a report vouching for the achievability of the results of the merger.

1. Accept the engagement and perform additional research or consult with others to obtain sufficient competence. Explanation: The CPA may accept the engagement but should conduct research or consult with others to obtain a sufficient level of knowledge about the subject of the engagement. An AICPA member should undertake only those professional services that the member or the member's firm can reasonably expect to be completed with professional competence.

Which of the following is required for a CPA firm to designate itself as "Members of the American Institute of Certified Public Accountants" on its letterhead? 1. All CPA owners must be members. 2. The owners whose names appear in the firm name must be members. 3. At least one of the owners must be a member. 4. The firm must be a dues-paying member.

1. All CPA owners must be members. Explanation: Which of the following is required for a CPA firm to designate itself as "Members of the American Institute of Certified Public Accountants" on its letterhead? All CPA owners must be members. The owners whose names appear in the firm name must be members. At least one of the owners must be a member. The firm must be a dues-paying member.

During the course of an audit, an auditor required additional research and consultation with others. This additional research and consultation is considered to be 1. An appropriate part of the professional conduct of the engagement. 2. An unusual practice indicating that the CPA should not have accepted the engagement. 3. A failure on the part of the CPA to comply with GAAS because of a lack of competence. 4. A responsibility of the management, not the auditor.

1. An appropriate part of the professional conduct of the engagement. Explanation: The Code of Professional Conduct states that in many cases additional research and consultation with others may be necessary during an engagement. The auditor should not undertake the engagement unless (s)he has or expects to gain the knowledge to complete the audit with professional competence.

1. An individual on the attest engagement team. 2. A staff member in the same office as the engagement team. 3. Any partner of the accounting firm. 4. An individual who can influence the engagement. 5. A partner or manager who provides more than 10 hours of nonattest services to the attest client in any fiscal year. 6. A partner in the same office where the lead engagement partner primarily practices. 7. The accounting firm itself. 8. A staff member who provides nonattest services to the client. Covered member or Not a covered member

1. Covered member 2. Not a covered member 3. Not a covered member 4. Covered member 5. Covered member 6. Covered member 7. Covered member 8. Not a covered member

A violation of the profession's ethical standards most likely occurred when a CPA in public practice 1. Expressed an unmodified opinion on the Year 2 financial statements when fees for the Year 1 audit were unpaid. 2. Has a sister participating in the audit engagement who is a production manager for the client. 3. Joined an accounting firm made up of three non-CPA practitioners. 4.Performed corporate finance consulting for an attest client.

1. Expressed an unmodified opinion on the Year 2 financial statements when fees for the Year 1 audit were unpaid. Explanation: Audit fees that are long past due take on the characteristics of a loan. Independence is impaired if billed or unbilled fees, or a note arising from the fees, for client services rendered more than 1 year prior to the current year's report date, remain unpaid when the current year's report is issued. However, this ruling does not apply if the client is in bankruptcy. Moreover, long overdue fees do not preclude the CPA from performing services not requiring independence.

Which of the following acts by a CPA who is in business most likely is a violation of the ethical standards of the profession? 1. Failing to disclose material facts when the employer's external accountant has requested written representations. 2. The member accepts a commission for selling a product. 3. The member sells a newsletter bearing his or her name. 4. Compiling the CPA's employer's financial statements and referring to the CPA's lack of independence.

1. Failing to disclose material facts when the employer's external accountant has requested written representations. Explanation: A member in business must be candid and not knowingly misrepresent facts or fail to disclose material facts. For example, this interpretation applies when the member responds to specific inquiries from the external accountant that requests written representations.

In which of the following situations would a covered member's independence be considered to be impaired? I. The covered member maintains a checking account that is fully insured by a government deposit insurance agency at an audit-client financial institution. II. The covered member has a direct financial interest in an audit client, but the interest is maintained in a blind trust. III. The covered member owns a commercial building and leases it to an audit client. The lease is properly classified as a finance lease, and the rental income is material to the CPA. 1. II and III. 2. I, II, and III. 3. I and II. 4. I and III.

1. II and III Explanation: When a member leases property to or from a client, independence is not impaired if (1) the lease meets the criteria of an operating lease, (2) the terms and conditions of the agreement compare with those of similar leases, and (3) all amounts are paid in accordance with the lease. However, if the lease meets all the criteria of a finance lease, it impairs a covered member's independence. The reason is that a finance lease is considered a loan to or from the client. Moreover, independence is impaired if, during the period of the professional engagement, a covered member had (or was committed to acquire) any direct or any material indirect financial interest in the client. When a covered member is a trust beneficiary, the trust is deemed to be a direct financial interest, and the underlying investments are indirect financial interests. However, the beneficiary of a blind trust is also the grantor. The grantor normally can amend or revoke the trust, and the investments will finally revert to him or her. Thus, the blind trust and the investments are deemed to be direct financial interests of the covered member.

1. Sam is on an engagement team that provides attest services to Many Stock Mutual Fund. Sam's wife owns 300 shares of Many Stock Mutual Fund. 2. Staci can influence the attest engagement of Perfect Plastics. Staci's husband owns an immaterial number of shares of a diversified mutual fund that happens to hold some shares of Perfect Plastics. 3. Jack is the lead engagement partner on the audit of a new client, Amber Relics. Joseph, another partner who works in the same office as Jack, was employed by Amber Relics 2 years ago. 4. Susan is on the engagement team for the audit of SWS. Susan has a material investment in PPS. During the audit, Susan discovered that SWS had an immaterial investment in PPS. 5. After Professional CPAs performed attest services for Business Corp., Professional CPAs sued Business Corp. because Business Corp. did not pay the full amount of fees billed. The unpaid amount is not material to either party. Impaired, Not impaired, or may be impaired

1. Impaired 2. Not impaired 3. May be impaired 4. Not impaired 5. Not impaired

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? 1. New legislation. 2. A theoretical disagreement with a standard promulgated by the FASB. 3. Conflicting industry practices. 4. An unusual degree of materiality.

1. New legislation. Explanation: Examples of unusual circumstances that permit a departure from promulgated GAAP are (1) new legislation or (2) the evolution of a new form of business transaction. But determination of what constitutes unusual circumstances is normally a matter of professional judgment.

A CPA most likely does not violate the Code's Integrity and Objectivity Rule, if the CPA 1. Performs expert witness services for a nonissuer attest client that is one of many plaintiffs in a class action lawsuit. 2. Subordinates his or her judgment to that of client personnel when performing consulting services. 3. Knowingly makes materially misleading entries in an entity's financial records. 4. Accepts the judgment of a client instead of his or her own when performing tax services.

1. Performs expert witness services for a nonissuer attest client that is one of many plaintiffs in a class action lawsuit. Explanation: Litigation services, a type of forensic accounting services, involve assisting in actual or potential legal or regulatory proceedings. They include expert witness services, that is, the expression of an opinion based on the member's expertise, not his or her knowledge of disputed facts. These services impair independence unless (1) they are rendered to a large group of parties, (2) no attest client is the lead plaintiff or defendant, and (3) other requirements related to the influence of attest clients on the proceedings are met. Thus, the attest client must be less than 20% of (1) the members of the group of plaintiffs (or defendants), (2) the voting interests of the group, and (3) the claim. Moreover, the client should not have sole power to select the expert witness. However, if expert services unrelated to the audit are provided to an audit client that is an issuer covered by the Securities Exchange Act of 1934, the CPA will lack independence (Sarbanes-Oxley Act of 2002).

Which of the following most completely describes how independence has been defined by the accounting profession? 1. Possessing the ability to act with integrity and objectivity. 2. Accepting responsibility to act professionally and in accordance with a professional code of ethics. 3. Avoiding the appearance of significant interests in the affairs of an audit client. 4. Performing an audit from the viewpoint of the public.

1. Possessing the ability to act with integrity and objectivity. Explanation: Integrity, objectivity, and independence are overlapping concepts. Integrity requires honesty and candor within the limits of confidentiality. It also requires, among other things, observation of the Principle of objectivity and independence. Objectivity is impartiality, intellectual honesty, and freedom from conflicts of interest. Independence precludes relationships that "may appear to impair objectivity in rendering attestation services." Thus, in rendering services, a member in public practice should be independent in appearance as well as in fact.

Which of the following is a correct statement regarding the nature and timing of communications between an accounting firm performing an initial audit of an issuer and the issuer's audit committee? 1. Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence. 2. Communications related to independence may occur in any form prior to issuance of the financial statements. 3. Prior to accepting the engagement, the firm must orally affirm its independence to the audit committee with all members present. 4. The firm must address all independence impairment issues on the date of the audit opinion.

1. Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence. Explanation: Before accepting an initial engagement under PCAOB standards, a registered public accounting firm must (1) describe in writing to the audit committee all relationships between (a) the firm and (b) the client or a person in a financial reporting oversight role that may bear on independence; (2) discuss with the audit committee the effects of those relationships on the independence of the firm if it becomes the auditor; and (3) document the substance of the discussion. At least annually for each issuer audit client, a registered public accounting firm must (1) describe in writing to the audit committee all relationships between (a) the firm and (b) the client or a person in a financial reporting oversight role that may bear on independence; (2) discuss with the audit committee the effects of those relationships on the independence of the firm; (3) document the substance of the discussion; and (4) affirm to the audit committee in writing that the firm is independent.

The SEC has strengthened auditor independence by requiring that management 1. Report the nature of disagreements with former auditors. 2. Select auditors by a majority vote by the officers. 3. Engage auditors to report in accordance with the Foreign Corrupt Practices Act. 4. Avoid any social contact with the auditors.

1. Report the nature of disagreements with former auditors. Explanation: The SEC requires that the management of an issuer (public company) report the nature of disagreements with former auditors by filing Form 8-K. Such disclosure inhibits management from changing auditors to gain acceptance of a questionable accounting principle. Also, a potential auditor must inquire of the predecessor auditor before accepting an engagement (AU-C 210). Thus, the inquiry provides an opportunity to confirm the information given in the 8-K report. However, confidential client information may only be communicated with the client's consent.

Various situations create threats to auditor independence. Which type of threat most likely results from an auditor's financial interest in a client? 1. Self-interest threat. 2. Self-review threat. 3. Management participation threat. 4. Advocacy threat.

1. Self-interest threat Explanation: Self-interest threats are benefits from a relationship with the attest client (e.g., having a financial interest in the client).

Inclusion of which of the following statements in a CPA's advertisement is not acceptable pursuant to the AICPA Code of Professional Conduct? 1. Paul Fall Certified Public Accountant J.D., Evans Law School 1984 2. Paul Fall Certified Public Accountant Fluency in Spanish and French 3. Paul Fall Certified Public Accountant Endorsed by AICPA 4. Paul Fall Certified Public Accountant Free Consultation

3. Paul Fall Certified Public Accountant Endorsed by AICPA Explanation: Solicitation may not be false, misleading, or deceptive. Thus, a CPA may not claim to be endorsed by the Institute. The AICPA does not make endorsements. A member may, however, state that (s)he is a member.

The Sarbanes-Oxley Act limits the nonaudit services that an audit firm can provide to issuer audit clients. Which of the following services is still an allowable service that an auditor may provide to an issuer client? 1. Tax compliance services. 2. Management consulting services. 3. Legal services. 4. Internal audit and other specified services.

1. Tax compliance services. Explanation: The Sarbanes-Oxley Act prohibits audit firms from providing consulting, legal, internal auditing, and other specified services to issuer audit clients. Moreover, any other service may be prohibited by the PCAOB. Audit firms may provide other nonaudit services, such as conventional tax planning and compliance services, to issuer audit clients. However, the audit committee must preapprove these other nonaudit services to be provided by the auditor.

Each of the following broker-dealer relationships impairs auditor independence with respect to a broker-dealer issuer audit client except 1. The auditor has a cash balance in a brokerage account that is fully covered by the Securities Investor Protection Corporation. 2. The auditor has a brokerage account that holds both U.S. securities and assets other than cash or securities. 3. The auditor has a brokerage account that includes assets other than cash or securities. 4. The auditor has a brokerage account that holds U.S. securities in excess of Securities Investor Protection Corporation coverage limits.

1. The auditor has a cash balance in a brokerage account that is fully covered by the Securities Investor Protection Corporation. Explanation: Under SEC Independence Standards, an accountant is not independent when (1) the accounting firm, (2) any covered person in the firm, or (3) any of the covered person's immediate family members has any brokerage or similar accounts maintained with a broker-dealer that is an audit client if (1) the accounts include any asset other than cash or securities or (2) the value of the assets in the accounts exceeds the amount that is subject to a Securities Investor Protection Corporation advance for those accounts. Thus, a cash balance in a brokerage account that is fully insured under the Securities Investor Protection Act (SIPA) does not impair independence.

Which of the following best describes the effect of a contingent fee arrangement on the auditor's independence? 1. The contingent fee arrangement impairs independence. 2. The contingent fee arrangement does not impair independence if it is consistent with the registered public accounting firm's quality control policies. 3. The contingent fee arrangement impairs independence unless approved by the client's audit committee. 4. The contingent fee arrangement does not impair independence unless more than half of the fee is subject to contingencies.

1. The contingent fee arrangement impairs independence. Explanation: A fee is contingent if it is dependent on a finding or a result. A member in public practice cannot perform certain services for a contingent fee without impairing independence, e.g., (1) audits or reviews of financial statements, (2) an examination of prospective financial information, (3) certain tax services, and (4) a compilation that reasonably might be used by a third party that does not disclose the lack of independence in the report.

The AICPA Code of Professional Conduct states, in part, that a CPA should maintain integrity and objectivity. Objectivity in the Code refers to a CPA's ability 1. To maintain an impartial attitude on all matters that come under the CPA's review. 2. To be unyielding in all matters dealing with auditing procedures. 3. To independently choose between alternate accounting principles and auditing standards. 4. To independently distinguish between accounting practices that are acceptable and those that are not.

1. To maintain an impartial attitude on all matters that come under the CPA's review. Explanation: According to the Principles, "Objectivity is a state of mind, a quality that lends itself to a member's services. It is a distinguishing feature of the profession. The principle of objectivity imposes the obligation to be impartial, intellectually honest, and free of conflicts of interest."

Under the Code of Professional Conduct of the AICPA, which of the following is required to be independent in fact and appearance when discharging professional responsibilities? 1. A CPA in public practice providing tax and management advisory services. 2. A CPA in public practice providing auditing and other attestation services. 3. A CPA not in public practice. 4. All CPAs.

2. A CPA in public practice providing auditing and other attestation services. Explanation: According to the Principles of Professional Conduct, "A member in public practice should be independent in fact and appearance when providing audit and other attestation services."

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? 1. Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts. 2. A distinguishing mark of a profession is its acceptance of responsibility to the public. 3. Ethical standards that emphasize excellence in performance over material rewards establish a reputation for competence and character. 4. A requirement for a profession is to establish ethical standards that stress primarily a responsibility to clients and colleagues.

2. A distinguishing mark of a profession is its acceptance of responsibility to the public. Explanation: According to the Principles section of the AICPA Code of Professional Conduct, "Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism. A distinguishing mark of a profession is acceptance of its responsibility to the public."

Fact Pattern: A CPA firm was purchased by a public company. The acquirer performs other professional services and has banking, insurance, and brokerage subsidiaries. The owners and employees became employees of a subsidiary. Also, the previous owners formed a new CPA firm that provides attest services. It leases employees, offices, and equipment from the parent, which also provides advertising, billing, and collection services. In the alternative practice structure (APS) of which the new firm is a part, covered members are closely aligned with other persons and entities. Who is subject to the same independence rules as covered members? 1. An indirect superior to whom a direct superior reports. 2. An employee leased by the firm from the parent. 3. The spouse of an indirect superior. 4. Any indirect superior.

2. An employee leased by the firm from the parent. Explanation: The independence rules ordinarily apply in their entirety only to the persons and entities included in the definition of a covered member: (1) the traditional firm (the new firm), (2) its owners, (3) individuals employed or leased by the new firm, and (4) entities controlled by such persons. The independence rules also apply in their entirety to (1) direct superiors of a partner or manager who is a covered member and (2) entities within the APS subject to significant influence by a direct superior.

According to the standards of the profession, which of the following activities may be required in exercising due professional care? 1. Consulting with Experts - Yes Obtaining Specialty Accreditation - Yes 2. Consulting with Experts - Yes Obtaining Specialty Accreditation - No 3. Consulting with Experts - No Obtaining Specialty Accreditation- Yes 4. Consulting with Experts - No Obtaining Specialty Accreditation - No

2. Consulting with Experts - Yes Obtaining Specialty Accreditation - No Explanation: A CPA should undertake only those services that (s)he reasonably expects to complete with professional competence and should exercise due professional care in performing those services. Additional research or consultation with others may be necessary to gain sufficient competence to complete a service in accordance with professional standards. However, professional standards do not require specialty accreditation, although many CPAs choose to specialize in specific services.

A CPA is permitted to disclose confidential client information without the consent of the client to I. Another CPA firm if the information concerns suspected tax return irregularities II. A state CPA society voluntary peer review board 1. I only. 2. II only. 3. Both I and II. 4. Neither I nor II.

2. II only Explanation: Under the Confidential Client Information Rule, a CPA may reveal confidential information without the client's permission for a state board- or state society-sponsored peer review. Identifying information revealed to the review team is precluded from disclosure. However, a CPA may not disclose information to another CPA firm without the client's permission or unless pursuant to a valid subpoena.

Advertising or other forms of solicitation that are false, misleading, or deceptive are not in the public interest, and AICPA members in public practice shall not seek to obtain clients in such a manner. Such activities include all the following except those that 1. Create unjustified expectations of favorable results. 2. Indicate the CPA's educational and professional attainments. 3. Claim to be able to save the taxpayer 20% of a determined tax liability. 4. Imply the ability to influence a court.

2. Indicate the CPA's educational and professional attainments. Explanation: Advertising and solicitation are acceptable if they do not involve falsehood or deception.

A CPA who is not in public practice is obligated to follow which of the following rules of conduct? 1. Independence. 2. Integrity and objectivity. 3. Contingent fees. 4. Commissions.

2. Integrity and objecivity Explanation: Under the Integrity and Objectivity Rule, all members must maintain objectivity and integrity, be free of conflicts of interest, not knowingly misrepresent facts, and not subordinate his or her judgment to others when performing professional services.

The AICPA's Code of Professional Conduct includes a Form of Organization and Name Rule. It states that a member may practice public accounting only in a form or organization allowed by law or regulation that conforms with resolutions of the AICPA Council. Assume that a CPA firm is part of an alternative practice structure (APS) in which the firm is a subsidiary of another entity. Which attribute prevents a member of the AICPA from practicing public accounting in the APS? 1. Substantially all revenues of the firm are paid to another entity. 2. Non-CPAs own a majority of the firm's financial interests. 3. The parent performs back-office functions for the firm. 4. The parent leases employees to the firm.

2. Non-CPAs own a majority of the firm's financial interests Explanation: The overriding focus of the Council Resolution, the Code, the bylaws, and other AICPA requirements is that CPAs remain responsible, financially and otherwise, for the attest work performed to protect the public interest. Thus, CPAs must own a majority of the firm in terms of financial interests and voting rights. However, in the context of alternative practice structures (APSs), CPAs may own the majority of financial interests and voting rights in the attest firm, but substantially all revenues may be paid to another entity in return for services and the lease of employees, equipment, etc. Nevertheless, given the safeguards in the resolution, Code, etc., if the CPA-owners of the attest firm remain financially responsible under state law, they are deemed to be in compliance with the financial-interests requirements of the resolution.

Which of the following areas of professional responsibility should be observed by a CPA not in public practice? 1. Objectivity - No Independence - Yes 2. Objectivity - Yes Independence - No 3. Objectivity - No Independence - No 4. Objectivity - Yes Independence - Yes

2. Objectivity - Yes Independence - No Explanation: Under the Integrity and Objectivity Rule, members in public practice and in business must maintain objectivity and integrity, be free of conflicts of interest, not knowingly misrepresent facts, and not subordinate his or her judgment to others when performing professional services. But the Independence Rule applies only to CPAs in public practice.

According to SEC independence regulations, 1. All audit partners must rotate every 5 years. 2. Preapproval of accountants' services may be in accord with detailed policies and procedures rather than explicit. 3. The issuer must disclose only those fees paid to the accountant for audit work. 4. No partner may sell nonaudit services to the client during the audit.

2. Preapproval of accountants' services may be in accord with detailed policies and procedures rather than explicit. Explanation: Audit committees ordinarily must preapprove the services performed by accountants (permissible nonaudit services and all audit, review, and attest engagements). Approval must be either explicit or in accordance with detailed policies and procedures. If approval is based on detailed policies and procedures, the audit committee must be informed, and no delegation of its authority to management is allowed.

The General Standards Rule does not require a member to 1. Complete all engagements with professional competence. 2. Provide assurance about prospective financial statements. 3. Plan and supervise adequately the performance of professional services. 4. Obtain sufficient relevant data to afford a reasonable basis for all conclusions

2. Provide assurance about prospective financial statements Explanation: Guidance for assurance on prospective statements is provided by AT-C 305, Prospective Financial Information.

According to the ethical standards of the profession, which of the following acts generally is prohibited? 1. Accepting a contingent fee for representing a client in connection with obtaining a private letter from the Internal Revenue Service. 2. Retaining client-provided records after the client has demanded their return. 3. Revealing client tax returns to a prospective purchaser of the CPA's practice. 4. Issuing a modified report explaining the CPA's failure to follow a governmental regulatory agency's standards when conducting an attest service for a client.

2. Retaining client-provided records after the client has demanded their return. Explanation: Retention of client-provided records after the client has demanded their return is an act discreditable to the profession. Even if the state in which a member practices grants a lien on certain records, the ethical standard still applies.

Which of the following reports may be issued only by an accountant who is independent of a client? 1. Report on consulting services. 2. Standard report on an examination of a financial forecast. 3. Compilation report on a financial projection. 4. Compilation report on historical financial statements.

2. Standard report on an examination of a financial forecast. Explanation: A member in public practice must be independent in the performance of professional services as required by standards issued by bodies designated by the AICPA Council. These standards include Statements on Standards for Attestation Engagements, which apply to, among other things, prospective financial statements (forecasts and projections). Thus, the Independence Rule and the SSAEs require a practitioner to be independent when performing an examination of a financial forecast.

According to the Sarbanes-Oxley Act of 2002, which of the following non-audit services can be provided by a registered public accounting firm to the client contemporaneously with the audit when preapproval is granted by audit committee action? 1. Internal audit outsourcing services. 2. Tax services. 3. Actuarial services related to the audit. 4. Advice on financial information system design

2. Tax services Explanation: According to the Sarbanes-Oxley Act of 2002, which of the following non-audit services can be provided by a registered public accounting firm to the client contemporaneously with the audit when preapproval is granted by audit committee action? Internal audit outsourcing services. Tax services.

A registered public accounting firm is conducting an audit of an issuer and initiated its current-year audit on January 1, Year 3. Many of the firm's former auditors are now employed by the client. Under which of the following circumstances may the firm perform the audit? 1. The client's controller was a staff accountant on the audit for 2 weeks during Year 2. 2. The client's CFO was the lead partner on the audit until December 31, Year 1. 3. The client's CEO was a manager on the audit until June 30, Year 2. 4. The client's chief accounting officer was the concurring partner on the audit until April 15, Year 2.

2. The client's CFO was the lead partner on the audit until December 31, Year 1. Explanation: Independence of the accounting firm is impaired if a former partner or professional employee of the firm is subsequently employed or associated with an attest client in a key position. However, independence is not impaired if the person is no longer associated or active with the CPA firm and any retirement compensation is fixed. A CPA firm is independent if the former lead partner did not participate in any capacity in the audit of the issuer during the year before the beginning of the audit.

A member of the AICPA owns an interest in a separate business that performs tax services. If the member does not control the business, who must comply with the Code of Professional Conduct? 1. The entity and the member. 2. The member only. 3. The entity's employees. 4. The other owners.

2. The member only Explanation: A member in public practice may own an interest in a separate business that performs the services for which standards are established, e.g., if the member, individually or with his or her firm or members of the firm, controls the separate business (as defined by the FASB Codification), the entity and all its owners and employees must comply with the Code. Absent such control, the member, but not the separate business, its other owners, and its employees, would be subject to the Code.

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? 1. Distributing business cards indicating the CPA designation and the CPA's title and employer. 2. Using the CPA designation without disclosing employment status in connection with financial statements issued for external use by the CPA's employer. 3. Compiling the CPA's employer's financial statements and referring to the CPA's lack of independence. 4. Corresponding on the CPA's employer's letterhead, which contains the CPA designation and the CPA's employment status.

2. Using the CPA designation without disclosing employment status in connection with financial statements issued for external use by the CPA's employer. Explanation: A member not in public practice who uses the CPA designation in a manner implying that (s)he is independent of the employer has committed a knowing misrepresentation of fact.

On June 1, Year 1, a CPA obtained a $100,000 personal loan from a financial institution client for whom the CPA provided compilation services. The loan was fully secured and considered material to the CPA's net worth. The CPA paid the loan in full on December 31, Year 1. On April 3, Year 2, the client asked the CPA to audit the client's financial statements for the year ended December 31, Year 2. Is the CPA considered independent with respect to the audit of the client's December 31, Year 2, financial statements? 1. Yes, because the loan was fully secured. 2. Yes, because the CPA was not required to be independent at the time the loan was granted. 3. No, because the CPA had a loan with the client during the period of a professional engagement. 4. No, because the CPA had a loan with the client during the period covered by the financial statements.

2. Yes, because the CPA was not required to be independent at the time the loan was granted. Explanation: An attest engagement requires independence as required by AICPA standards. Accountants who perform audits and reviews are required by AICPA standards to be independent. However, a compilation merely assists management in presenting information in the form of financial statements. It does not provide any assurance that no material modifications should be made for them to be in accordance with the applicable reporting framework. Although a compilation is not an assurance engagement, it is an attest engagement (AR-C 60). Furthermore, AICPA standards do not require an accountant to be independent to perform a compilation. But if (s)he is not independent, a final paragraph of the report should so state. Thus, the CPA was not required to be, and was not, independent during Year 1. Because the loan was paid in full during Year 1, the CPA is considered independent with respect to the audit of the client's Year 2 financial statements. The CPA had no loan from the client during the engagement.

Under the AICPA's conceptual framework for independence, the member-client relationship is evaluated to determine whether independence in fact and appearance is jeopardized. This is considered 1. A sufficiency of safeguards approach. 2. An avoidance approach. 3. A risk-based approach. 4. A professional skepticism approach.

3. A risk-based approach Explanation: The risk-based approach evaluates the risk that a CPA is not independent or is perceived by a reasonable and informed third party with knowledge of all relevant information as not independent. That risk must be reduced to an acceptable level to establish independence. Risk is acceptable when threats are acceptable. They may be acceptable because of the types of threats and their potential effect. Moreover, threats may be sufficiently mitigated or eliminated by safeguards. Threats are acceptable when it is not reasonable to expect that they will compromise professional judgment.

To which of the following parties may a CPA partnership provide its audit documentation, without being lawfully subpoenaed or without the client's consent? 1. The IRS. 2. The FASB. 3. Any surviving partner(s) on the death of a partner. 4. A CPA before purchasing a partnership interest in the firm.

3. Any surviving partner(s) on the death of a partner. Explanation: Audit documentation may be disclosed to another partner of the accounting firm without the client's consent because such information has not been communicated to outsiders. A partner of the CPA has a fiduciary obligation to the client not to disclose confidential information without consent.

The concept of materiality is least important to an auditor when considering the 1. Adequacy of disclosure of a client's illegal act. 2. Discovery of weaknesses in a client's internal control. 3. Effects of a direct financial interest in the client on the CPA's independence. 4. Decision whether to use positive or negative confirmations of accounts receivable.

3. Effects of a direct financial interest in the client on the CPA's independence. Explanation: Independence is impaired if a CPA has any direct financial interest in a client. Whether this direct financial interest is material is irrelevant. The test of materiality is applied, however, if the financial interest is indirect.

According to the standards of the profession, which of the following circumstances will prevent a CPA performing audit engagements from being independent? 1. Litigation with a client relating to billing for consulting services for which the amount is immaterial. 2. Acting as an honorary trustee for a not-for-profit organization client. 3. Employment of the CPA's spouse as a client's director of internal audit. 4. Obtaining a collateralized automobile loan from a financial institution client.

3. Employment of the CPA's spouse as a client's director of internal audit. Explanation: With certain exceptions, the immediate family (spouse, spousal equivalent, or dependent) of a covered member (e.g., an individual on an attest engagement team) is subject to the Independence Rule. One exception is permitted for the employment by the client of an individual in the covered member's immediate family. However, this exception does not apply if the employment was in a key position. A director of internal audit holds a key position.

According to the PCAOB, an accounting firm's independence is least likely to be impaired if the firm 1. Provides a service to the audit client for a contingent fee. 2. Receives a commission from the audit client. 3. Has an audit client that employs a former firm professional. 4. Provides tax services to a person in a financial reporting oversight role at the audit client.

3. Has an audit client that employs a former firm professional. Explanation: Firm independence is impaired by a client's employment of a former firm professional that could adversely affect the audit unless safeguards are established. Pre-change safeguards include removal from the audit of those negotiating with the client, and post-change safeguards include possibly modifying the audit plan.

A violation of the profession's ethical standards would most likely occur when a CPA 1. Is controller of a bank and permits the bank to use the controller's CPA title in the listing of officers in its publications. 2. Obtains an engagement to perform services for a customer obtained by a third party as a result of its solicitation efforts. 3. Is the sole shareholder in a professional accountancy corporation and uses the designation "and company" in the firm title. 4. Who is also admitted to the Bar represents on letterhead to be both an attorney and a CPA.

3. Is the sole shareholder in a professional accountancy corporation and uses the designation "and company" in the firm title. Explanation: A firm name may not be misleading. The designations "and Company," "and Associates," or "& Co." are misleading when a member is a sole owner because they may be interpreted to mean more than one owner.

According to the profession's ethical standards, which of the following events may justify a departure from an established accounting principle? 1. New Legislation - No Evolution of a New Form of Business Transaction - Yes 2. New Legislation - Yes Evolution of a New Form of Business Transaction - No 3. New Legislation - Yes Evolution of a New Form of Business Transaction - Yes 4. New Legislation - No Evolution of a New Form of Business Transaction - No

3. New Legislation - Yes Evolution of a New Form of Business Transaction - Yes Explanation: In general, strict compliance with accounting principles is required. However, the Accounting Principles Rule recognizes that, due to unusual circumstances, adhering to GAAP may cause financial statements to be misleading. New legislation and the evolution of a new form of business transaction are events that may justify departure from an established accounting principle.

According to the AICPA Code of Professional Conduct, which of the following actions will impair independence? 1. Assisting a client in drafting a stock-offering document or memorandum. 2. Preparing client financial statements based on information in a trial balance. 3. Participating in the hiring or termination of a client's employees. 4. Processing payroll for a client's signature based on client recordkeeping.

3. Participating in the hiring or termination of a client's employees. Explanation: A member's independence is impaired by assuming management responsibilities for an attest client. The management participation threat to independence cannot be reduced to an acceptable level if a member (1) commits the client to employee compensation or benefit arrangements or (2) hires or terminates the client's employees (ET 1.295.135.03).

The AICPA Code of Professional Conduct is violated if a CPA accepts a fee for services and the fee is 1. Fixed by a public authority. 2. Based on the results of judicial proceedings in a tax matter. 3. Payable after a specified finding is attained in a review of financial statements. 4. Based on a price quotation submitted in competitive bidding.

3. Payable after a specified finding is attained in a review of financial statements. Explanation: A contingent fee is dependent on a specified finding. The Code prohibits contingent fees (1) for the audit or review of a financial statement, (2) for a compilation if a third party is reasonably expected to use the financial statement and the report does not mention the member's lack of independence, (3) for an examination of prospective financial information, and (4) for the preparation of original or amended tax returns or claims for tax refunds. However, contingent fees may be accepted for other services.

According to the standards of the profession, which of the following activities most likely does not impair a CPA's independence? 1. Contracting with a client to supervise the client's office personnel. 2. Accepting a luxurious gift from an attest client. 3. Providing extensive advisory services for a client. 4. Signing a client's checks in emergency situations.

3. Providing extensive advisory services for a client. Explanation: Performance of advisory services does not, by itself, impair the independence required for attest services.

Which of the following actions by a CPA most likely violates the profession's ethical standards? 1. Compiling the financial statements of a nonpublic client that employed the CPA's spouse as a bookkeeper. 2. Purchasing a segment of an insurance company's business that performs actuarial services for a nonpublic client's employee benefit plans. 3. Retaining client-provided records after the client has demanded their return. 4. Arranging with a financial institution to collect notes issued by a client in payment of fees due.

3. Retaining client-provided records after the client has demanded their return. Explanation: Retention of client-provided records after demand is made for them by the client is an act discreditable to the profession and a violation of the Code. Even if the state in which a member practices grants a lien on certain records, this ethical standard is applicable.

The AICPA Code of Professional Conduct contains both general ethical principles that are aspirational in character and also a 1. List of violations that would cause the automatic suspension of a member's license. 2. List of specific acts discreditable to the profession. 3. Set of specific, mandatory rules describing minimum levels of conduct a member must maintain. 4. Description of a member's procedures for responding to an inquiry from a trial board.

3. Set of specific, mandatory rules describing minimum levels of conduct a member must maintain. Explanation: The AICPA Code contains Principles and Rules. The principles are goal-oriented. The rules provide more specific guidance. The principles call for an unswerving commitment to honorable behavior but are not mandatory. The AICPA bylaws require members to adhere to the Rules. Those who fail to comply with the rules may face disciplinary action.

Bingham, a CPA, has been asked to join a local bank's board of directors. In which of the following scenarios would such a position be acceptable for Bingham? 1. One of Bingham's clients has several business loans outstanding with the bank. 2. One of Bingham's clients, who is struggling financially, is in the loan application process at the bank. 3. Several of Bingham's clients have savings accounts at the bank. 4. Several of Bingham's clients are in negotiations with this and other banks for operating loans.

3. Several of Bingham's clients have savings accounts at the bank. Explanation:Bingham should maintain objectivity and be free of conflicts of interest. Objectivity is a state of mind that lends value to a member's services and is a distinguishing feature of the profession. A member must be impartial, intellectually honest, and free of conflicts of interest. Additionally, a member in public practice should be independent in fact and appearance when providing attestation services. Thus, Bingham maintains the appearance of independence while his clients only have savings accounts at the bank. However, if Bingham's clients were to have outstanding loans or be involved in the loan application process, Bingham could be construed as being in a position to inappropriately provide his clients improper assistance.

Which of the following statements is true regarding an accountant's working papers? 1. The client owns the working papers, but, in the absence of the accountant's consent, may not disclose them without a court order. 2. The client owns the working papers, but the accountant has custody of them until the accountant's bill is paid in full. 3. The accountant owns the working papers but generally may not disclose them without the client's consent or a court order. 4. The accountant owns the working papers and generally may disclose them as the accountant sees fit.

3. The accountant owns the working papers but generally may not disclose them without the client's consent or a court order. Explanation: A member's working papers, including any analyses and schedules prepared by the client at the request of the member, are the member's property, not the client's. However, a member in public practice ordinarily must not disclose confidential client information contained in the working papers without the client's specific consent. Exceptions to this principle include compliance with a subpoena or summons or with applicable laws and regulations.

A member of the AICPA may render which service under a contingent fee arrangement? 1. A CPA audits the financial statements of a company that intends to issue securities for sale to the public, with the fee contingent upon the proceeds from the sale of the securities. 2. A CPA examines prospective financial statements for a client who intends to sell limited partnerships, with the CPA's fee contingent upon the proceeds. 3. A CPA compiles financial statements for a client seeking a loan, with the fee contingent upon the amount the client is able to borrow. The report does not disclose lack of independence. 4. A CPA provides investment advisory services, with the fee based on a percentage of the client's investment portfolio.

4. A CPA provides investment advisory services, with the fee based on a percentage of the client's investment portfolio. Explanation: The member is not in violation of the Code if (1) the fee is based on a specified percentage of the portfolio, (2) the dollar amount of the portfolio on which the fee is based is determined at the beginning of each quarter (or longer period, if agreed) and is adjusted only for client additions or withdrawals, and (3) the fee arrangement is not renewed more often than quarterly.

During an audit of the financial statements of a company, the CFO provides a spreadsheet to the audit team that contains a number of errors that are material to the financial statements. Under what circumstances would this situation be a violation of the rules of the Sarbanes-Oxley Act of 2002 on improper influence on the conduct of audits? 1. The CFO discovers and corrects most of the errors in the spreadsheet, which was prepared by a staff accountant. One immaterial error remains of which the CFO is aware, and this error remains undetected by the audit team, but the financial statements end up being fairly presented. 2. The CFO was unaware of the errors in the spreadsheet, which was prepared by a staff accountant and reviewed by the CFO. The errors remain undetected by the audit team, and the financial statements are materially misleading. 3. The audit team discovers the errors through alternate procedures when they discern that the spreadsheet was improperly manipulated by the CFO. This intentional conduct of the CFO does not succeed in affecting the audit. 4. The CFO had the spreadsheet prepared by a vendor of the company; the vendor intentionally misstates information in the spreadsheet, and the CFO does not discover the misstatements. The errors remain undetected by the audit team, and the financial statements are materially misleading.

3. The audit team discovers the errors through alternate procedures when they discern that the spreadsheet was improperly manipulated by the CFO. This intentional conduct of the CFO does not succeed in affecting the audit. Explanation: It is unlawful for (1) any officer or director of an issuer to do any act (2) to fraudulently influence, coerce, manipulate, or mislead any auditor performing an audit if (3) the purpose is to render the financial statements materially misleading. The CFO is not excused by failure to affect the audit.

According to the profession's ethical standards, an auditor would be considered independent in which of the following instances? 1. The client owes the auditor fees for two consecutive annual audits. 2. The auditor is also an attorney who advises the client as its general counsel. 3. The auditor's checking account, which is fully insured by a federal agency, is held at a client financial institution. 4. A member donates service as CFO of a charitable organization that is a client during the period covered by the financial statements.

3. The auditor's checking account, which is fully insured by a federal agency, is held at a client financial institution. Explanation: The independence of a member or a member's firm is not impaired if the member's depository relationship (checking, savings, certificates of deposit, money market accounts) is fully insured by a state or federal deposit insurance agency. Moreover, uninsured amounts do not impair independence if they are immaterial.

An accounting firm's independence is most likely to be impaired when 1. The firm has a material financial interest in a nonclient but does not know of the client's material financial interest in the investee. 2. An immediate family member is employed by the client in other than a key position. 3. The firm and the client have a material cooperative arrangement. 4. In an agreed-upon procedures engagement, the firm is independent of the responsible party but not the party that engaged the firm.

3. The firm and the client have a material cooperative arrangement. Explanation: Independence is impaired if, during the engagement or at the time of expressing an opinion, a member's firm had any material cooperative arrangement with the client. A cooperative arrangement involves joint participation in a business activity. However, joint participation in a business activity is not a cooperative arrangement when the participants (1) do not have a common understanding, arrangement, or agreement; (2) are not responsible for the other's activities or results; and (3) are not agents for each other.

A firm performed an attest engagement to apply agreed-upon procedures to help KIG Co. determine whether it should acquire FTBL Co. FTBL is responsible for the information to which procedures were applied. Who most likely is not required to be independent of the responsible party? 1. Anyone who consulted with the engagement team about technical matters specific to the engagement. 2. Anyone on the engagement team. 3. The firm, if it designed the responsible party's information system. 4. The supervisor of an engagement partner.

3. The firm, if it designed the responsible party's information system. Explanation: The following covered members and their immediate families must be independent in relation to the responsible party: (1) an individual on the attest engagement team; (2) an individual who directly supervises or manages the attest engagement partner; and (3) individuals who consult with the attest engagement team about technical or industry-related matters specific to the engagement. Independence also is impaired if the firm had a material relationship with the responsible party prohibited under the Independence Rule. Moreover, a firm may provide nonattest services to the responsible party that normally are prohibited, e.g., designing the financial information system. However, if the nonattest services do not relate directly to the subject matter of the attest engagement, independence is not impaired.

When a former partner of a registered public accounting firm who left the firm 2 years ago accepts a financial reporting oversight role at an issuer audit client, the independence of the registered public accounting firm is considered impaired unless which of the following is true? 1. The former partner exerts only limited influence over the registered public accounting firm's operations and financial policies. 2. The former partner discloses the relationship to the issuer audit client's board of directors. 3. The former partner has no remaining capital balance in the registered public accounting firm. 4. The former partner was employed by the registered public accounting firm for a period of 2 years or less.

3. The former partner has no remaining capital balance in the registered public accounting firm. Explanation: PCAOB Interim Independence Standards apply to audits of issuers. They include the AICPA's prior Conduct Rule 101, Independence, and related rulings and interpretations as of April 16, 2003, to the extent not superseded or amended. According to these PCAOB interim standards, a firm's independence may be impaired with respect to a client if a partner or professional employee leaves the firm and is subsequently employed by or associated with that client in a key position. However, independence is not impaired if, among other things, amounts due to the former partner or professional employee for (1) his or her previous interest in the firm and (2) unfunded, vested retirement benefits are not material to the firm. This assumes that the underlying formula used to calculate the payments remains fixed during the payout period. Retirement benefits also may be adjusted for inflation, and interest may be paid on amounts due. Moreover, the former partner or professional employee must not be in a position to influence the accounting firm's operations or financial policies. Under SEC independence standards, a registered public accounting firm is not independent if a former partner, principal, shareholder, or professional employee is in an accounting role or a financial reporting oversight role at an issuer audit client. But independence is not impaired if the individual (1) does not influence the accounting firm's operations or financial policies, (2) has no capital balances in the accounting firm, and (3) has no financial arrangement with the accounting firm other than one providing for regular payment of a fixed dollar amount (not dependent on the revenues, profits, or earnings of the accounting firm). PCAOB rules require compliance with the SEC rules if they are more restrictive.

According to the AICPA Code of Professional Conduct, which of the following activities results in an act discreditable to the profession? 1. A CPA who is engaged to perform a government audit neglects to follow certain government auditing requirements and discloses in the audit report the fact that such requirements were not followed and the reasons for it. 2. A CPA signs a document containing immaterial, false, and misleading information or permits or directs another CPA to do so. 3. A CPA fails to give a client copies of the CPA's workpapers related to a completed and issued work product upon the client's request because the client has not paid fees payable to the CPA for the work product. 4. A CPA solicits recent Uniform CPA Examination questions without written authorization from the AICPA.

4. A CPA solicits recent Uniform CPA Examination questions without written authorization from the AICPA. Explanation: Solicitation or knowing disclosure of May 1996 or later CPA examination questions or answers without written authorization by the AICPA is an act discreditable to the profession.

When Congress passed the Sarbanes-Oxley Act of 2002, it imposed greater regulation on public companies and their auditors and required increased accountability. Which of the following is not a provision of the act? 1. Executives must certify the appropriateness of the financial statements. 2. The act provides criminal penalties for fraud. 3. Auditors may not provide specific nonaudit services for their audit clients. 4. Audit firms must be rotated on a periodic basis.

4. Audit firms must be rotated on a periodic basis Explanation: The act requires rotation of the lead audit or coordinating partner and the reviewing partner on audits of public clients every 5 years. However, the act does not require the rotation of audit firms.

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 1. Obtains a home mortgage from the bank. 2. Serves on the bank's committee that approves loans. 3. Owns several shares of the bank's common stock. 4. Designs an information system for the bank that is unrelated to its accounting records.

4. Designs an information system for the bank that is unrelated to its accounting records. Explanation: Independence is not impaired by designing, developing, installing, or integrating a client's information system that is unrelated to its financial statements or accounting records.

According to the AICPA Code of Professional Conduct, which of the following disclosures of client information by a member CPA to an outside party would normally require client consent? 1. Disclosure to a potential client of the name of a client for whom the member or member's firm performed professional services. 2. Disclosure of confidential client information to a court or in documents in connection with a subpoena. 3. Disclosure of confidential client information to the member's liability insurance carrier in response to a potential claim. 4. Disclosure of confidential client information to a third-party service provider when the member does not enter into a confidentiality agreement with the provider.

4. Disclosure of confidential client information to a third-party service provider when the member does not enter into a confidentiality agreement with the provider. Explanation: A member in public practice must not disclose confidential client information without the client's consent. However, this rule does not affect a CPA's obligations to (1) comply with a valid subpoena or summons or with applicable laws and regulations, (2) discharge his or her professional obligations, (3) cooperate in an official review of his or her professional practice, and (4) initiate a complaint with or respond to any inquiry made by an appropriate investigative or disciplinary body. Moreover, a member in public practice may disclose confidential client information to a third-party service provider used by the member to provide professional services or for administrative support purposes. However, before using such a service provider, the member should enter into a contract with the service provider to maintain the confidentiality of the information and be reasonably assured that the service provider has appropriate procedures to prevent the unauthorized release of confidential information to others. If the member does not have a confidentiality agreement with a third-party service provider, specific client consent should be obtained.

With respect to records in a CPA's possession, the Code of Professional Conduct provides that 1. The auditor who has provided records to a client must comply with any subsequent requests to again provide such information. 2. Worksheets in lieu of a general ledger belong to the auditor and need not be furnished to the client upon request. 3. An auditor may retain client-provided records if fees due with respect to a completed engagement have not been paid. 4. Extensive analyses of inventory prepared by the client at the auditor's request are working papers that belong to the auditor and need not be furnished to the client upon request.

4. Extensive analyses of inventory prepared by the client at the auditor's request are working papers that belong to the auditor and need not be furnished to the client upon request. Explanation: A member's working papers include, among other items, audit programs, analytical review schedules, statistical sampling results, analyses, and schedules prepared by the client at the request of the member. Working papers are the property of the member and need not be provided to the client unless required by (1) statute, (2) regulation, or (3) contract.

Kar, CPA, is a staff auditor participating in the audit engagement of Fort, Inc. Which of the following circumstances most likely impairs Kar's independence? 1. During the period of the professional engagement, Fort gives Kar tickets to a football game worth $25. 2. Kar's friend, an employee of another local accounting firm, prepares Fort's tax returns. 3. Kar owns stock in a corporation that Fort's 401(k) plan also invests in. These interests are immaterial. 4. Kar's sibling is the director of internal auditing for Fort.

4. Kar's sibling is the director of internal auditing for Fort. Explanation: Independence is impaired if an individual participating in the audit engagement has a close relative who has a key position with the client. A close relative is a parent, sibling, or independent child. A key position is one in which an individual has (1) primary responsibility for significant accounting functions that support material components of the financial statements, (2) primary responsibility for the preparation of the financial statements, or (3) the ability to exercise influence over the contents of the financial statements. Thus, because Kar's sibling is the director of internal auditing for Fort, Inc., auditor independence is impaired.

Which of the following statements is (are) true regarding a CPA employee of a CPA firm taking copies of information contained in client files when the CPA leaves the firm? I. A CPA leaving a firm may take copies of information contained in client files to assist another firm in serving that client. II. A CPA leaving a firm may take copies of information contained in client files as a method of gaining technical expertise. 1. I only. 2. II only. 3. Both I and II. 4. Neither I nor II.

4. Neither I nor II Explanation: The Acts Discreditable Rule states that a member shall not commit an act discreditable to the profession. After the relationship of a member who is not an owner of the firm is terminated, the member may not take or retain copies or originals from the firm's client files or proprietary information without permission.

An auditor may provide an issuer client any of the following nonaudit services without impairing independence and without obtaining the preapproval of the audit committee, except 1.. Nonaudit services with revenues in aggregate of less than 5% of the total revenues paid by the issuer to the auditor during the fiscal year in which the nonaudit services are provided. 2. Nonaudit services that were promptly brought to the attention of, and approved by, the audit committee prior to the completion of the audit. 3. Services that the issuer did not recognize as nonaudit services at the time of the engagement. 4. Nonaudit services to perform financial information systems design and implementation.

4. Nonaudit services to perform financial information systems design and implementation. Explanation: A member shall not disclose confidential client information without the client's consent unless it is disclosed to (1) comply with a valid subpoena or summons or with applicable laws and regulations, (2) discharge his or her professional obligations, (3) cooperate in an official review of his or her professional practice, or (4) initiate a complaint with or respond to any inquiry made by an appropriate investigative or disciplinary body. In a bankruptcy case, the implication that a client is in financial difficulty may make his or her name confidential information. If no exception applies, client confidentiality has been violated.

When is the independence of the CPA auditor of a client company's financial statements most likely to be impaired because of involvement in litigation? 1. A creditor of the client sues the CPA alleging reliance on materially misstated financial statements. 2. An underwriter of securities is a co-defendant with the client and the CPA. It files a cross-claim against the CPA, but the client does not. 3. A director of another client is a co-defendant with the client and the CPA. This person files a cross-claim against the CPA. 4. Shareholders of the client bring a class action against the client, its management, and the CPA. The CPA files a cross-claim against management alleging fraud.

4. Shareholders of the client bring a class action against the client, its management, and the CPA. The CPA files a cross-claim against management alleging fraud. Explanation: Independence is not necessarily impaired when the CPA is a co-defendant with the client. However, cross-claims filed by the co-defendants against each other may impair independence. For example, the client may allege that the CPA was negligent, or the CPA may allege that the client's management committed fraud. In these circumstances, the interests of the client and the CPA are opposed, and independence may be impaired.

A CPA serving as a bank director should not be concerned with 1. The CPA's independence with respect to a client's receiving a large loan from the bank. 2. A possible conflict of interest between the bank and the CPA's clients. 3. Disclosure of confidential client information to the bank. 4. The compatibility of serving as a bank director and the possibility of soliciting clients.

4. The compatibility of serving as a bank director and the possibility of soliciting clients. Explanation: The Code of Professional Conduct does not prohibit solicitation of clients. Solicitation is permitted if it is not false, misleading, or deceptive.

According to the PCAOB, an accounting firm is most likely to be independent of its audit client if 1. A reasonable investor would conclude that it is not objective and impartial. 2. The firm's audit professional is responsible for internal control over financial reporting. 3. The firm's audit professional implemented the client's internal control over financial reporting. 4. The firm recommended an aggressive tax position to the client that is more likely than not to be legally allowed.

4. The firm recommended an aggressive tax position to the client that is more likely than not to be legally allowed. Explanation: A firm is not independent of its audit client if, during the audit and engagement period, it provides any nonaudit service related to marketing, planning, or expressing an opinion in favor of the tax treatment of aggressive tax-position transactions for the purpose of tax avoidance. However, this Rule does not apply if the tax treatment is at least more likely than not to be allowable under tax law.

Regarding employment or association with attest clients, the employment of a former partner by a client in a key position most likely impairs firm independence if 1. Team members have interactions with the former partner. 2. Amounts are to be paid to the former partner based on a fixed formula. 3. The former partner cannot influence the accounting firm's operations. 4. The former partner consults with the accounting firm.

4. The former partner consults with the accounting firm. Explanation: A former partner or professional employee of the firm who is employed by or associated with an attest client in a key position impairs the firm's independence unless, among other things, the former partner does not participate or appear to participate in, and is not associated with, the firm, regardless of compensation. For example, such activity may be by consulting, use of an office, or inclusion in membership lists.