Audit Chapter 4

Identify an activity that may not affect independence of mind but is likely to affect independence in appearance. A. Performance of valuation services and actuarial services for the same company. B. Dependence upon a client for a large percentage of audit fees. C. Payment of high audit fees dependent upon profitable financials. D. Engagement of the CPA and payment of audit fees by a third party. E. Ownership of an immaterial indirect financial interest in the audited client.

B. Dependence upon a client for a large percentage of audit fees.

What organization is responsible for developing ethics standards at the international​ level? A. Public Company Accounting Oversight Board​ (PCAOB) B. International Ethics Standards Board for Accountants​ (IESBA) C. Auditors International Code of Professional Accountants​ (AICPA) D. International Financial Reporting Standards​ (IFRS)

B. International Ethics Standards Board for Accountants​ (IESBA)

What are common rationalizations individuals use to justify their unethical​ behavior? A. The belief that the unethical behavior will be detected evenutally and that the unethical behavior does not adversely affect others. B. Others are doing the same​ thing; the behavior is not explicitly​ illegal; and the belief that the unethical behavior will not be detected. C. It is my life and I can do what I​ want; the behavior is illegal and I will probably get​ caught, but​ it's worth the risk. D. The fact that others have done it and have been caught.

B. Others are doing the same​ thing; the behavior is not explicitly​ illegal; and the belief that the unethical behavior will not be detected.

Discuss whether ethics should be​ taught, for​ example, in university courses. A. Everyone believes that ethics are simple and can be easily taught. Among those that believe that ethics can be​ taught, some believe there should be specific courses in​ ethics, and others believe ethics should be embedded throughout coursework. B. Some believe that ethics are innate and cannot be taught. Others believe ethics should not be taught but instilled by parents and others. Among those who believe ethics should be​ taught, some believe there should be specific courses in​ ethics, and others believe ethics should be embedded throughout coursework. C. Everyone believes that ethics are innate and cannot be taught. Ethics should be instilled by parents and other adults. Ethics are not something that can be learned in the classroom. D. Most believe that ethics are simple and can be easily taught. The numbers are few that believe ethics cannot be taught but must be instilled by parents and other adults. Among those that believe ethics can be​ taught, all believe that there should be specifc course in ethics.

B. Some believe that ethics are innate and cannot be taught. Others believe ethics should not be taught but instilled by parents and others. Among those who believe ethics should be​ taught, some believe there should be specific courses in​ ethics, and others believe ethics should be embedded throughout coursework.

Objectivity

Being unbiased when auditing for a client

Describe what constitutes​ "ethics" and highlight the challenges of developing a set of rules and guidance to increase ethical behavior in society. A. Ethics are a set of moral principles or values. There are limited challenges to developing a set of rules and guidance to increase ethical behavior in society. Each individual has their own set of​ values, but different groups define ethical values in pretty similar ways. Most ethical values can be defined well enough to be enforced. B. Ethics are a set of professional principles or values. Many of us use ethics daily. It is relatively easy to develop a set of rules and guidance to increase ethical behavior in society. Each individual has their own set of​ values, and different groups define ethical values in different ways. Many ethical values can be defined well enough to be enforced. C. Ethics are a set of moral principles or values. There are several challenges to developing a set of rules and guidance to increase ethical behavior in society. Each individual has their own set of​ values, and different groups define ethical values in different ways.​ Also, many ethical values cannot be defined well enough to be enforced. D. Ethics are a set of professional principles or values. It is relatively easy to develop a set of rules and guidance to increase ethical behavior in society. There is a different set of ethical values for each​ profession, but ethical values are defined similarly across the board. Ethical values are defined well enough to be enforced.

C. Ethics are a set of moral principles or values. There are several challenges to developing a set of rules and guidance to increase ethical behavior in society. Each individual has their own set of​ values, and different groups define ethical values in different ways.​ Also, many ethical values cannot be defined well enough to be enforced.

Why do individuals act​ unethically? A. Selfishness B. Greed C. Individual has different values than society D. All of the above E. None of the above

D. All of the above

What are the three categories of members under the AICPA Code of Professional Conduct​? A. ​1) Members in​ business; 2) Members in private​ practice; and​ 3) other members. B. ​1) Members in private​ practice; 2) members in public​ practice; and​ 3) other members. C. ​1) Members in public​ practice; 2) members in private​ practice; and​ 3) members in business. D. ​1) Members in public​ practice; 2) members in​ business; and​ 3) other members.

D. ​1) Members in public​ practice; 2) members in​ business; and​ 3) other members.

Step 6 of the approach to resolving an ethical dilemma

Decide the appropriate action.

Step 3 of the approach to resolving an ethical dilemma

Determine who is affected by the outcome of the dilemma and how each person or group is affected.

The threat of familiarity to the compliance of AICPA code of professional conduct rules.

Due to a long/close relationship with the client, the auditor will be sympathetic to the client's interest.

Implementing a financial information system designed by management for a private company.

No

Is Providing advice to a private company client on accounting for a merger with another private company a violation of AICPA rules or SEC rules Including Sarbanes-Oxley?

No

Providing bookkeeping services to a private company. The source documents were prepared and authorized by the client.

No

Providing internal audit services to a public company that is not an audit client.

No

Recommending a tax shelter to a client that is publicly held. The services were preapproved by the audit committee.

No

Step 1 of the approach to resolving an ethical dilemma

Obtain the relevant facts.

first safeguard against threats toward the code of professional conduct

Safeguards created by the profession, legislation, or regulation

Direct financial interest (independence of an auditor)

Stock or equity owned by the auditor or their immediate family

In which one of the following situations would a CPA be in violation of the AICPA Code of Professional Conduct in determining the audit​ fee? 1. A fee based on whether the​ CPA's report on the​ client's financial statements results in the approval of a bank loan. 2. A fee based on the outcome of a bankruptcy proceeding. 3. A fee based on the nature of the service rendered and the​ CPA's expertise instead of the actual time spent on the engagement. 4. A fee based on the fee charged by the prior auditor.

1. A fee based on whether the​ CPA's report on the​ client's financial statements results in the approval of a bank loan.

Which of the following services can be offered to public company audit clients under SEC requirements and the Sarbanes-Oxley ​Act? 1. Tax services for executives involved in financial reporting 2. Tax planning not involving tax shelters 3. Internal audit outsourcing 4. Bookkeeping and other accounting services

2. Tax planning not involving tax shelters

The AICPA Code of Professional Conduct states that a CPA shall not disclose any confidential client information obtained in the course of a professional engagement except with the consent of the client. In which one of the following situations would disclosure by a CPA be in violation of the Code​? 1. Disclosing confidential information in compliance with a subpoena issued by a court. 2. Disclosing confidential information in order to properly discharge the​ CPA's responsibilities in accordance with the​ profession's standards. 3. Disclosing confidential information to another accountant interested in purchasing the​ CPA's practice. 4. Disclosing confidential information during an​ AICPA-authorized peer revie

3. Disclosing confidential information to another accountant interested in purchasing the​ CPA's practice.

An auditor strives to achieve independence in appearance to 1. comply with the auditing standards related to audit performance. 2. become independent in fact. 3. maintain public confidence in the profession. 4. maintain an unbiased mental attitude.

3. maintain public confidence in the profession.

A​ CPA's retention of client records as a means of enforcing payment of an overdue audit fee is an action that is 1. not addressed by the AICPA Code of Professional Conduct. 2. acceptable if sanctioned by the state laws. 3. prohibited under the AICPA rules of conduct. 4. a violation of generally accepted auditing standards.

3. prohibited under the AICPA rules of conduct.

What is the meaning of the rule that requires the auditor be​ independent? 1. The auditor must adopt a critical attitude during the audit. 2. The​ auditor's sole obligation is to third parties. 3. The auditor may have a direct ownership interest in the​ client's business if it is not material. 4. The auditor must be without bias with respect to the client under audit.

4. The auditor must be without bias with respect to the client under audit.

The threat of self-review to the compliance of AICPA code of professional conduct rules.

An auditor will not appropriately evaluate the results of a previous judgement or service performed and the auditor will rely on that service performed in forming a judgement as part of another service.

the threat of management participation to the compliance of AICPA code of professional conduct rules.

An auditor will take of the role of manager of the client and will not be providing auditing services anymore or will become paid to take on this position.

Indirect financial interest (independence of an auditor)

An auditor's mutual fund that has a portion of investment in the client's business.

second safeguard against threats toward the code of professional conduct

safeguard implemented by the client

third safeguard against threats toward the code of professional conduct

safeguard implemented by the firm, policies and procedures

The threat of undue influence to the compliance of AICPA code of professional conduct rules.

the threat that an auditor will subordinate their judgement to an individual associated with a client/ 3rd party due to that individual's reputation/expertise/aggressive dominant personality/ or attempt to force their opinion on the auditor.

The threat of Advocacy to the compliance of AICPA code of professional conduct rules.

the threat that the auditor will promote a client's interest/position to the point that the auditor's independence or objectivity is compromised.

Providing internal audit services to a public company audit client with the preapproval of the audit committee.

Yes

What are the fundamental principles of the international ethics​ standards? A. ​(1) Integrity,​ (2) Objectivity,​ (3) Professional competence and due​ care, (4)​ Confidentiality, and​ (5) Professional behavior B. ​(1) Professional​ behavior, (2)​ Respect, (3)​ Objectivity, (4)​ Responsibility, and​ (5) Loyalty C. ​(1) Respect,​ (2) Professional​ behavior, (3)​ Integrity, (4)​ Trustworthiness, and​ (5) Responsibility D. ​(1) Fairness,​ (2) Professional competence and due​ care, (3)​ Trustworthiness, (4)​ Objectivity, and​ (5) Confidentiality

A. (1) Integrity,​ (2) Objectivity,​ (3) Professional competence and due​ care, (4)​ Confidentiality, and​ (5) Professional behavior

Why is ethics important to the conduct of business in a market-based ​economy? A. Ethics is important to the conduct of business because it is difficult to transact with others without confidence that they will conduct business in an ethical manner. B. Ethics is not important to the conduct of business in a market-based economy. Using ethics is a personal choice and has nothing to do with business. C. Ethics is not important to the conduct of business in a market-based economy. Ethics is only important when dealing with small businesses and proprietorships. D. Ethics is important to the conduct of business because it is difficult to do business with someone if they do not share your exact ethical outlook.

A. Ethics is important to the conduct of business because it is difficult to transact with others without confidence that they will conduct business in an ethical manner.

Distinguish between independence of mind and independence in appearance. A. Independence of mind exists when the auditor is actually able to maintain an unbiased attitude throughout the​ audit, whereas independence in appearance is dependent on​ others' interpretation of this independence and hence their faith in the auditor. B. Independence of mind is dependent upon the board of directors maintaining a professional level with the​ auditors, whereas independence in appearance provides for restrictions on employment of former audit firm employees by a client. C. Independence of mind is a code of professional ethics where auditors remain skeptical of the information they receive throughout the​ audit, whereas independence in appearance is a code of professional conduct that allows any CPA firm to sign the financials of a company. D. Independence of mind requires audit partner to rotate to help maintain and keep​ independence, whereas independence in appearance maintains that the work produced is mainly for support of the client and that relationship.

A. Independence of mind exists when the auditor is actually able to maintain an unbiased attitude throughout the​ audit, whereas independence in appearance is dependent on​ others' interpretation of this independence and hence their faith in the auditor.

Step 4 of the approach to resolving an ethical dilemma

Identify the alternatives available to the person who must resolve the dilemma.

Step 2 of the approach to resolving an ethical dilemma

Identify the ethical issues from the facts.

Step 5 of the approach to resolving an ethical dilemma

Identify the likely consequence of each alternative.

Financial interests of close family members (independence of an auditor)

If the investment is material, there may be reason to suspect an auditor's independence because their relative has a substantial influence on the client.

the threat of self-interest to the compliance of AICPA code of professional conduct rules.

The auditor could benefit financially from the relationship with the client.

The threat of adverse interest to the compliance of AICPA code of professional conduct rules.

The auditor will not be unbiased because the auditor's interests are opposed to the client's interests.

Providing bookkeeping services to a public company. The services were preapproved by the audit committee of the company.

Yes