Auditing: Quiz 2 - Topic 3

Which of the following acts by a CPA would most likely be a violation of the AICPA Code of Professional Conduct? Assisting a client in preparing a financial forecast. Forming a professional corporation to practice as a CPA. Accepting a fee in a tax matter relating to an administrative client. A "Covered Member's" spouse owns an immaterial amount of stock in an audit client.

A "Covered Member's" spouse owns an immaterial amount of stock in an audit client.

Which of the following is a correct statement relative to auditor liability under common law? Auditors are normally liable to their clients for either ordinary or gross negligence in performing the audit. Auditors are liable to third parties for ordinary negligence if the third parties can demonstrate a material loss related to the financial statements. Due to the legal requirements associated with fraud it is not possible for an auditor to be guilty of criminal fraud. Auditors can escape liability by resigning membership in the AICPA.

Auditors are normally liable to their clients for either ordinary or gross negligence in performing the audit.

Roberts, CPA was involved in a lawsuit. The result of the lawsuit is that Roberts was found liable along with the Board of Directors and the associated Attorneys. The Attorneys were found to be 50% liable, the Board 15% liable and Roberts to be 35% liable. The judgement total was for $1,000,000. If the Attorneys and the Board are both unable to pay their portion and Roberts is found liable for the entire $1,000,000 then what legal doctrine was applied in the case? Proximate liability Statutory liability Proportionate liability Joint and Several liability

Joint and Several liability

Which of the following statements is correct? Supporting records not reflected in the client's records (e.g., proposed adjusting entries) may be withheld by the CPA if fees for the engagement have not yet been paid. Client prepared records (e.g. the general ledger) may be retained by the CPA until fees due to the CPA are received. CPA working papers are the joint property of the CPA and the client. CPA working papers that include copies of client's records are not available to third parties under any circumstances.

Supporting records not reflected in the client's records (e.g., proposed adjusting entries) may be withheld by the CPA if fees for the engagement have not yet been paid.

Linda Spring, CPA, is in court defending herself against charges filed under the Securities Act of 1933. In general Spring will escape liability under which of the following circumstances? That she followed GAAS in performing her audit. The paintiffs did not show that she performed the audit negligently. That she is not guilty of gross negligence. That she was overworked and did the best that could reasonably be expected given the circumstances.

That she followed GAAS in performing her audit.

The Securities Act of 1934 is considered to be friendlier to CPAs than the 1933 Act for which of hte following reasons? The 1933 Act requires that plaintiffs demonstrate that the financial statements are the proximate cause of their loss. The 1934 Act may not be relied upon by purchasers of securities. The 1934 Act requires that plaintiffs demonstrate that the auditors acted intentionally to mislead users of the financial statements. The 1934 Act may only be used in litigation by creditors.

The 1934 Act requires that plaintiffs demonstrate that the auditors acted intentionally to mislead users of the financial statements.

Which of the following elements is most frequently necessary to hold a CPA liable to a client? The CPA acted with scienter. The CPA failed to issue an unqualified opinion at the end of the engagement. The CPA failed to exercise due care. The CPA was grossly negligent.

The CPA failed to exercise due care.

Which of the following organizations may revoke the l icense of a CPA to practice? The SEC. The State Society of CPAs. The PCOAB. The AICPA.

The State Society of CPAs.

Winters, CPA conducted an audit of Green, Inc. The financial statements contained a misstatement in the filing with the SEC. Winters is being sued by an investor who purchased shares of Green in the initial public offering. Which of the following would be a viable defense by Winters? The investor did not rely on the financial statements in making the decision to purchase stock. The investor has not proved negligence by Winters. Winters detected the misstatement following the audit date. The misstatement is immaterial to the financial statements as a whole.

The misstatement is immaterial to the financial statements as a whole.

If plaintiffs file a suit against auditors based on common law which of the following approaches is most favorable to the auditors? Restatement of Torts Wiggins v. Hawkins Rosenblum Ultramares

Ultramares

In which of the following situations would a CPA firm be independent with respect to an audit client? a. A partner in the office but not assigned to the engagement owns 10% of the outstanding stock of the client. b. A professional employee assigned to the engagement has a spouse that is employed as a salesperson by the client. c. The partner that manages the firm's audit practice owns 100 shares of the client's stock. d. A manager that provides twenty hours of nonattest services to the client has a material indirect interest in the client.

a. A partner in the office but not assigned to the engagement owns 10% of the outstanding stock of the client.

Rules issued under the Sarbanes-Oxley Act of 2002 restrict former members of an audit engagement team from accepting employment as a chief executive, chief financial or chief accounting officer, or controller of an audit client that files reports with the Securities and Exchanges Commission. How many annual audit period(s) must be completed before such employment can be accepted? a. One. b. Two. c. Three. d. Five.

a. One.

The AICPA allows an auditor to perform which of the following services for an audit client? a. Performance of bookkeeping services for the client. b. Authorization of transactions for the client. c. Preparation of client source documents. d. Preparation and posting of journal entries without the client's approval.

a. Performance of bookkeeping services for the client.

Which of the following statements is true with respect to the PCAOB and SEC's concept of independence when an auditor both prepares financial statements and audits those financial statements for a client? a. The auditor is not independent. b. The auditor is independent if he or she is able to maintain a level of professional detachment. c. The auditor can audit the financial statements only if the audit process does not culminate in the expression of an opinion on the financial statements. d. The auditor cannot audit the financial statements since a lack of integrity exists.

a. The auditor is not independent.

A CPA who is not in public practice is obligated to follow which of the following rules of conduct? a. Independence. b. Integrity and objectivity. c. Contingent fees. d. Commissions.

b. Integrity and objectivity.

When an accountant is not independent, the accountant is precluded from issuing a: a. Compilation report. b. Review report. c. Management advisory report. d. Tax planning report.

b. Review report.

An auditor's independence is considered impaired if the auditor has a. An immaterial, indirect financial interest in a client b. An automobile loan from a client bank, collateralized by the automobile. c. A joint, closely held business investment with the client that is material to the auditor's net worth. d. A mortgage loan, executed with a financial institution client on March 1, 1990, that is material to the auditor's net worth.

c. A joint, closely held business investment with the client that is material to the auditor's net worth.

Under the ethical standards of the profession, which of the following investments by a CPA in a corporate client is an indirect financial interest? a. An investment held in a retirement plan. b. An investment held in a blind trust. c. An investment held through a regulated mutual fund. d. An investment held through participation in an investment club.

c. An investment held through a regulated mutual fund.

The profession's ethical standards would most likely be considered to have been violated when a CPA a. Continued an audit engagement after the commencement of litigation against the CPA alleging excessive fees filed in a stockholder's derivative action. b. Represented to a potential client that the CPA's fees were substantially lower than the fees charged by other CPAs for comparable services. c. Issued a report on a financial forecast that omitted a caution regarding achievability. d. Accepted a consulting engagement concerning data processing services for which the CPA lacked independence.

c. Issued a report on a financial forecast that omitted a caution regarding achievability.

Which of the following is not considered a threat to independence in the Conceptual Framework for AICPA Independence Standards? a. Self-review threat. b. Familiarity threat. c. Public interest threat. d. Financial self-interest threat.

c. Public interest threat.

Which of the following is not an AICPA pronouncement enforceable under the AICPA Code of Professional Conduct? a. Statements on Auditing Standards. b. Statements on Standards for Accounting and Review Services. c. Statements on Responsibilities in Personal Consulting Advisory Practice. d. Statements on Standards for Valuation Services.

c. Statements on Responsibilities in Personal Consulting Advisory Practice.

According to the AICPA Code of Professional Conduct, in which of the following circumstances may a CPA serve on a company's board of directors? a. The CPA audits a bank to which the company has applied for financing, and board approval is required for said financing to occur. b. The CPA is asked by the company to test the internal controls of the company and offers compensation to the CPA for said services. c. The CPA does not audit the company and has no other business connection with the company. d. The CPA performs attestation services for a nonpublic company.

c. The CPA does not audit the company and has no other business connection with the company.

Which of the following family relationships is most likely to impair a CPA's independence with respect to a particular audit client on which the CPA works as a "covered member"? a. A close relative has a material investment in that client of which the CPA is not aware. b. A cousin has an immaterial investment in the client of which the CPA is aware. c. The CPA's father is president of the audit client. d. The CPA's spouse participates in a savings plan sponsored by the client.

c. The CPA's father is president of the audit client.

Which of the following is not a source of guidance to CPAs with respect to their professional responsibilities? a. Principles of the Code of Professional Conduct b. Interpretations of the Code of Professional Conduct c. Rules of the Code of Professional Conduct d. All of the above are sources of guidance

d. All of the above are sources of guidance