SU 2 Professional Responsibilities

Must a CPA in public practice be independent in fact and appearance when providing the following services? Compilation of Personal Financial Statements, Preparation of a Tax Return, Compilation of a Financial Forecast a. No, No, No b. Yes, No, No c. No, No, Yes d. No, Yes, No

a. No, No, No CPAs in public practice must be independent in fact and appearance when providing attestation services. Attestation services provide assurances about assertions and include audits, examinations, reviews, and applying agreed-upon procedures.

Which of the following areas of professional responsibility should be observed by a CPA not in public practice? Objectivity, Independence a. No, Yes b. Yes, No c. Yes, Yes d. No, No

b. Yes, No 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 the AICPA Code of Professional Conduct, which of the following records must a CPA return to the client when requested? a. The CPA's working papers consisting of analyses and schedules prepared by the client at the CPA's request. b. Supporting records prepared by the CPA consisting of adjusting, closing, combining, or consolidating entries prior to the completion of the engagement. c. Client-provided records, even if fees are due to the CPA for the engagement and are unpaid. d. Client-provided records requested for a second time because the client misplaced the first set of records.

c. Client-provided records, even if fees are due to the CPA for the engagement and are unpaid. Under the Acts Discreditable Rule, client-provided records must be returned after a client request without exception even if fees are due. Client-provided records are the client's accounting or other records, including hardcopy and electronic reproductions, that were provided to the member by, or for, the client.

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

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

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

c. Is the sole shareholder in a professional accountancy corporation and uses the designation "and company" in the firm title. 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.

Which of the following, if any, is prohibited by the AICPA Code of Professional Conduct? a. Failing to provide working papers to the client after a request has been made. b. Practice of public accounting in the form of a professional corporation that uses a firm name indicating specialization. c. Use of the partnership name for a limited period by one of the partners in a public accounting firm after the death or withdrawal of all other partners. d. All of the answers are permitted by the AICPA Code of Professional Conduct.

d. All of the answers are permitted by the AICPA Code of Professional Conduct. No response states conduct prohibited by the Code.

Ann Able, CPA, is considering forming a partnership with Ben Brown for the purpose of practicing public accounting. Which of the following is true? a. If Brown is not a CPA, he need not conform to the AICPA Code of Professional Conduct. b. The AICPA's Code of Professional Conduct requires Brown to be a CPA. c. If Brown is not a CPA, he may not participate in the management of the partnership. d. Brown need not be a CPA if the partnership does not represent itself as a partnership of CPAs.

d. Brown need not be a CPA if the partnership does not represent itself as a partnership of CPAs. The partnership may be created and public accounting services may be performed if the form of organization is permitted by law or regulation, provided that its characteristics conform to resolutions of the AICPA Council. Moreover, the firm may designate itself as "Members of the AICPA" if all CPA-owners are members. However, the partnership is not permitted to represent itself as a partnership of CPAs.

A member of the AICPA has been requested to serve as a client advocate on accounting matters in a hearing before a regulatory body. The member should consider whether it is appropriate to accept the engagement if I. The service stretches the bounds of performance standards. II. The service compromises credibility. III. The service exceeds sound and reasonable professional practice. a. I, II, and III. b. II only. c. II and III only. d. I and III only.

a. I, II, and III. Professional services involving client advocacy are governed by the Code (General Standards Rule, Compliance with Standards Rule, Accounting Principles Rule, and Integrity and Objectivity Rule). If independence is required for a service, the Independence Rule also applies. If the service (1) stretches the bounds of performance standards, (2) exceeds sound and reasonable professional practice, or (3) compromises credibility, it poses an unacceptable risk of injury to the member's or the firm's reputation. In these circumstances, the propriety of accepting the engagement should be considered.

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? a. Accept the engagement and perform additional research or consult with others to obtain sufficient competence. b. Accept the engagement and perform it in accordance with auditing standards. c. Decline the engagement because she lacks sufficient knowledge. d. Accept the engagement and issue a report vouching for the achievability of the results of the merger.

a. Accept the engagement and perform additional research or consult with others to obtain sufficient competence. 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.

CPAs are required to complete engagements competently. Competence includes all of the following except: a. An unbiased mental attitude. b. The capacity to exercise judgment. c. The technical qualifications of the CPA's staff. d. The ability to research subject matter and consult with others.

a. An unbiased mental attitude. The Code requires the CPA to maintain an unbiased mental attitude. A member in public practice must be independent in the performance of professional services as required by standards issued by bodies designated by Council.

At least how often should the PCAOB inspect a registered public accounting firm that regularly issues audit reports to 50 issuers? a. Every 3 years. b. Every 2 years. c. Annually. d. As requested by the firm.

a. Every 3 years. A registered public accounting firm is inspected at least once every 3 calendar years. This requirement must be met beginning with the 3-year period following the calendar year in which its application for registration with the PCAOB is approved. But the requirement does not apply unless the firm, during any of the 3 previous calendar years, (1) issued an audit report for at least 1, but no more than 100, issuers or (2) was substantially involved in preparing or providing an audit report for at least one issuer.

The appearance of independence of a CPA, or that CPA's firm, is most likely to be impaired if the CPA: a. Serves as an executor and trustee of the estate of an individual who owned the majority of the stock of a closely held client corporation. b. Joins a trade association, which is an attest client, and serves in a nonmanagement capacity. c. Accepts a token gift from an attest client. d. Provides appraisal, valuation, or actuarial services for an attest client.

a. Serves as an executor and trustee of the estate of an individual who owned the majority of the stock of a closely held client corporation. Independence is impaired with regard to the client if, during the period of the professional engagement, a covered member was a trustee of any trust or executor or administrator of any estate if such trust or estate had or was committed to acquire any direct or material indirect financial interest in the client, and the value of the estate's holdings in the client exceeded 10% of the estate's assets. Mere designation as a trustee or executor does not impair independence, but actual service does.

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? a. 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. b. A director of another client is a co-defendant with the client and the CPA. This person files a cross-claim against the CPA. c. A creditor of the client sues the CPA alleging reliance on materially misstated financial statements. d. 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.

a. 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. 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.

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? a. Tax compliance services. b. Management consulting services. c. Legal services. d. Internal audit and other specified services.

a. Tax compliance services. 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.

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

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

The Confidential Client Information Rule is violated when a member in public practice: a. Uses outside computer services to process tax returns. b. Provides client profit and loss percentages to a trade association without the client's consent. c. Performs consulting services for similar clients. d. Advises potential consulting services clients about previous problems on similar engagements.

b. Provides client profit and loss percentages to a trade association without the client's consent. Prior to disclosing confidential client profit and loss percentages to a trade association, the CPA must have specific client consent.

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

b. A member whose practice is primarily bankruptcy discloses a client's name. 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.

Under the ethical standards of the profession, which of the following positions would be considered a position of significant influence in an audit client? a. A staff position in the client's research and development division. b. A policy-making position in the client's finance division. c. A senior position in the client's human resources division. d. A marketing position related to the client's primary products.

b. A policy-making position in the client's finance division. Significant influence is defined in the FASB's Accounting Standards Codification. It means the ability to exercise significant influence over the financial, operating, or accounting policies of the entity, for example, by (1) being connected with the entity as a promoter, underwriter, voting trustee, general partner or director or (2) being in a policy-making position such as chief executive officer, chief operating officer, chief financial officer, or chief accounting officer. Thus, a policy-maker in the finance division has significant influence.

Under the ethical standards of the profession, which of the following business relationships would generally not impair an auditor's independence? a. Member of a client's board of directors. b. Advisor to a client's board of trustees. c. Client's general counsel. d. Promoter of a client's securities.

b. Advisor to a client's board of trustees. Independence is not impaired if the auditor's role is advisory.

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

b. Expressed an unmodified opinion on the Year 2 financial statements when fees for the Year 1 audit were unpaid. 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.

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

b. Has an audit client that employs a former firm professional. 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.

To help ensure auditor independence from management, issuers follow the practice of: a. Establishing a policy of discouraging social contact between employees of the issuer and the staff of the independent auditor. b. Having the independent auditor report to an audit committee of outside members of the board of directors. c. Appointing a partner of the CPA firm conducting the audit to the issuer's audit committee. d. Requesting that a representative of the independent auditor be on hand at the annual shareholders' meeting.

b. Having the independent auditor report to an audit committee of outside members of the board of directors. Issuers follow the practice of having the independent auditor report to an audit committee composed of outside members of the board of directors. Because these members are not officers of the company, the independence of the auditor from management is enhanced. The audit committee's functions typically include appointment of the auditor, reviewing the auditor's findings, mediating disputes between the auditor and management, and working with the internal audit staff.

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? a. Kar owns stock in a corporation that Fort's 401(k) plan also invests in. These interests are immaterial. b. Kar's sibling is the director of internal auditing for Fort. c. During the period of the professional engagement, Fort gives Kar tickets to a football game worth $25. d. Kar's friend, an employee of another local accounting firm, prepares Fort's tax returns.

b. Kar's sibling is the director of internal auditing for Fort. 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.

Under the ethical standards of the profession, which of the following is a "permitted loan" regardless of the date it was obtained? a. Personal loan. b. Secured automobile loan. c. Home mortgage loan. d. Student loan.

b. Secured automobile loan. Independence is generally impaired if a covered member has loans to or from a client. However, certain exceptions apply. One such exception is for an automobile loan collateralized by the vehicle.

Page, CPA, has T Corp. and W Corp. as audit clients. T Corp. is a significant supplier of raw materials to W Corp. Page also prepares individual tax returns for Time, the owner of T Corp., and West, the owner of W Corp. When preparing West's return, Page finds information that raises going-concern issues with respect to W Corp. May Page disclose this information to Time? a. Yes, because Page has a fiduciary relationship with Time. b. Yes, because there is no accountant-client privilege between Page and West. c. No, because the information is confidential and may not be disclosed without West's consent. d. No, because the information should only be disclosed in Page's audit report on W Corp.'s financial statements.

c. No, because the information is confidential and may not be disclosed without West's consent. A member in public practice cannot disclose confidential client information without the client's consent. The only exceptions are (1) in response to an enforceable subpoena; (2) a review of the CPA's professional practice; (3) a discharge of professional obligations; and (4) a response to an inquiry made by the professional ethics division, trial board of the AICPA, or an investigative or disciplinary body of a state society or board of accountancy.

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

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

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

c. Possessing the ability to act with integrity and objectivity. 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 prohibited by the AICPA Code of Professional Conduct? a. Practice of public accounting in the form of a professional corporation that uses a firm name indicating specialization. b. Failing to provide working papers to the client after a request has been made. c. Prematurely expressing an opinion based on an audit because of time pressures from the client. d. Use of the partnership name for a limited period by one of the partners in a public accounting firm after the death or withdrawal of all other partners.

c. Prematurely expressing an opinion based on an audit because of time pressures from the client. The Integrity and Objectivity Rule prohibits a member from subordinating his or her judgment to others. The auditor must complete the audit prior to signing the report.

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

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

According to the profession's ethical standards, an auditor is considered independent in which of the following instances? a. The client is the only tenant in a commercial building owned by the auditor. b. The auditor is the officially appointed stock transfer agent of a client. c. The auditor's checking account, which is fully insured by a federal agency, is held at a client financial institution. d. The client sponsors an employee benefit plan in which the auditor participates.

c. The auditor's checking account, which is fully insured by a federal agency, is held at a client financial institution. A CPA's independence is not impaired with respect to a financial institution if checking accounts, savings accounts, or certificates of deposit are fully insured. Moreover, uninsured amounts do not impair independence if they are immaterial.

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

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

A violation of the profession's ethical standards most likely would have occurred when a CPA: a. Made arrangements with a financial institution to collect notes issued by a client in payment of fees due for the current year's audit. b. Recommended a controller's position description with candidate specifications to an audit client. c. Purchased a CPA firm's practice of monthly write-ups for a percentage of fees to be received over a 3-year period. d. Expressed an unmodified opinion on the current year's financial statements when fees for the prior year's audit were unpaid.

d. Expressed an unmodified opinion on the current year's financial statements when fees for the prior year's audit were unpaid. 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.

According to the Code of Professional Conduct of the AICPA, for which type of service may a CPA receive a contingent fee? a. Performing an audit of a financial statement. b. Performing an examination of prospective financial information. c. Performing a review of a financial statement. d. Seeking a private letter ruling.

d. Seeking a private letter ruling. A contingent fee is dependent upon the finding or result. Fees are not considered to be contingent in tax matters if based on the results of judicial proceedings or the findings of government agencies. A fee is based on the findings of government agencies if the member can show a reasonable expectation at the time of the fee arrangement of substantive consideration by an agency with respect to the client. Thus, a contingent fee is allowed for representation of a client who is obtaining a private-letter ruling. A private letter ruling is a conclusion by the IRS for an individual taxpayer.

A violation of the profession's ethical standards would most likely have occurred when a CPA in public practice: a. Used a records-retention agency to store the CPA's working papers and client records. b. Referred life insurance assignments to the CPA's spouse, who is a life insurance agent. c. Served as an expert witness in a damage suit and received compensation based on the amount awarded to the plaintiff. d. Serves on a municipal board of income tax appeals, discloses that status to concerned parties, participates as a board member in a tax appeal involving a client, but does not receive the client's consent for such action.

d. Serves on a municipal board of income tax appeals, discloses that status to concerned parties, participates as a board member in a tax appeal involving a client, but does not receive the client's consent for such action. If the significant relationship creating a conflict of interest is disclosed to and consent is obtained from all appropriate parties, the Integrity and Objectivity Rule does not prohibit performance of the professional service. (But disclosure and consent do not eliminate an impairment of independence.) The failure to secure the client's consent therefore means that the arrangement could be viewed as impairing the CPA's objectivity.

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? a. The other owners. b. The entity and the member. c. The entity's employees. d. The member only.

d. The member only. 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.

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: a. To independently distinguish between accounting practices that are acceptable and those that are not. b. To independently choose between alternate accounting principles and auditing standards. c. To be unyielding in all matters dealing with auditing procedures. d. To maintain an impartial attitude on all matters that come under the CPA's review.

d. To maintain an impartial attitude on all matters that come under the CPA's review. 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."

Competence as an independent auditor includes all of the following except: a. Consulting others if additional technical information is needed. b. Having the technical qualifications to perform an engagement. c. Possessing the ability to supervise assistants. d. Warranting the infallibility of the work performed.

d. Warranting the infallibility of the work performed. The auditor is not a guarantor. The auditor's responsibility is to express (or disclaim) an opinion on whether the financial statements, taken as a whole, are presented fairly. The audit is planned and performed to provide reasonable, but not absolute, assurance that the financial statements are not materially misstated.