Chapter 2 Study Guide
Which is an example of scienter?
A CPA chooses to omit key facts from an audit report
Which of the following statements regarding common law is correct?
A CPA is in a direct contractual relationship with clients.
Which of the following best describes the independence requirements for a close relative of a covered member?
A close relative cannot hold a key position with an audit client.
Your firm has three offices: Traverse City, MI, Des Moines, IA, and Noblesville, IN. The Traverse City office is auditing Great Fruit Lodge. Which of the following individuals is NOT a covered member with respect to the Great Fruit Lodge audit?
A partner in the Des Moines office that does not provide services to the Great Fruit Lodge engagement.
According to the profession's ethical standards, an auditor would be considered independent in which of the following instances?
A professional employee, who does not work on the audit, has a spouse who is a marketing manager for an audit client.
Under the AICPA ethics rules on independence, which of the following individuals would not be a covered member?
A tax partner in another office who provides 9 hours of tax services to the audit client.
Which of the following statements regarding professionalism in the late 1990s is INCORRECT?
About 18% of all public companies had to restate their earnings.
During the audit of CleanCorp, the CPA received an indication from CleanCorp's attorney that CleanCorp intends to begin litigation against the firm for alleged poor-quality tax work in the previous year. Which threat does this relate to?
Adverse interest
The threat that a CPA will not act with objectivity because the CPA's interests are opposed to the client's interests.`
Adverse interest threat
The threat that a CPA will promote a client's interests or position to the point that his or her objectivity or independence is compromised.
Advocacy threat
Which of the following statements is true about interpretations of the AICPA Code of Professional Conduct?
An AICPA member who departs from an interpretation has the burden of justifying a departure in any disciplinary hearing.
A committee of the board of directors responsible for oversight of internal controls, financial reporting and disclosure in the financial statements, regulatory compliance, and the company's independent auditors.
Audit committee
What is the main similarity between conflict of interest and subordination of judgment?
Both can lead to a misrepresentation of the facts.
Which of the following is NOT a basis for a tort action?
Breach of contract
Without the consent of the client, a CPA should not disclose confidential client information contained in working papers to a:
CPA firm that is a likely successor auditor.
Which of the following statements is correct?
CPAs performing tax, consulting, and compilation services do not need to remain independent. However, the lack of independence must be disclosed in the compilation report.
Law based on justice, reason, and common sense, rather than on absolute rules.
Common law
The auditing firm of Garcia and Partners is being sued under common law. The plaintiff purports that the firm was negligent in its performance of the prior year audit. Garcia and Partners purports that the plaintiff did not provide accurate documents during the audit. What defense should Garcia and Partners use?
Contributory negligence defense
Assume you are an auditor on an engagement for Treadway Industries and you believe the allowance for doubtful accounts is inadequate and should be raised by $250,000. You have gathered data to support this. The CFO believes the allowance is adequate and discusses this with the senior auditor and they agree to raise the allowance by $100,000. You believe that this may result in a material misstatement. Which of the following steps should you take next?
Discuss your opinion and reasoning with the senior auditor.
The firm of Schultz and Gleason takes on the audit of Bagel Bakers, in which they do not properly follow GAAS, despite having the qualifications and training necessary to complete the audit. This is most likely a violation of
Due Care
The auditor's documentation should provide evidence that the audit was performed in accordance with auditing standards generally accepted in the United States.
Due care defense
An audit firm must show that it made a reasonable investigation, that the firm followed auditing standards, and accordingly had reasonable grounds to believe, and did believe, that the statements certified were true at the date of the statements and as of the time the registration statement became effective.
Due diligence defense
Loretta Feidler is managing the audit of a major manufacturing company. During the audit, Loretta fails to exercise professional skepticism. This is likely a violation of which of the following general standards?
Due professional care
Which occupation is most likely to be categorized as an EC professional?
Economic consultant
Under section 10(b) of the Securities Act of 1934 and the SEC promulgated Rule 10b-5, it is unlawful for any person, directly or indirectly, to do which of the following? Select all that apply.
Engage in any act, practice, or course of business that operates, or would operate, as a fraud or deceit on any person in connection with the purchase or sale of any security. Make any untrue statement of a material fact. Employ any device, scheme, or artifice to defraud.
Sara dreams of being a doctor and completes eight years of schooling. After graduating university, she passes a licensing exam and is selected to work at a community hospital as a general practitioner. Which element does NOT attest to her being a CPI professional?
Expert competitor
The threat that, due to a long or close relationship with a client, a CPA will become too sympathetic to the client's interests or too accepting of the client's work or product.
Familiarity threat
Which occupation is most likely to be categorized as a CPI professional?
Heart surgeon
Which of the following is the best synthesis of a CPA's response to learning that her brother has just been appointed CFO of the firm she has been asked to audit?
Identifies the familiarity threat and any others, evaluates individually and aggregately with other CPAs that the threat is significant, puts safeguards in place, evaluates that the safeguards are unacceptable and declines the engagement
A covered member's spouse, spouse equivalent, or dependent.
Immediate family member
A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council.
Independence
Avoiding potential conflicts of interest that can be observed by others.
Independent in appearance
What is a key difference between the concept of "independent in appearance" and "independent in fact"?
Independent in appearance can be observed whereas independence in fact is not easily observed.
In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.
Integrity and objectivity
Provide additional guidance regarding the scope and applicability of the rules of conduct.
Interpretations
Jenny Leung is auditing Rizell Pharmaceuticals, a publicly traded company. A court-appointed team from a state CPA society requests that she provide them with confidential information on the company, but Rizell refuses to give consent. Which course of action should Jenny take?
Jenny is obligated to share the requested information so long as the team has been duly constituted to investigate the company.
Which is an example of a case that could be pursued under tort law?
Lopez Auditing LLC intentionally deceives its client Hamad Jewelry through misrepresentation in the audit report.
The threat that a CPA will take on the role of client management or otherwise assume management responsibilities.
Management participation threat
Which of the following statements is correct?
Members who depart from the interpretations of the AICPA Code of Professional Conduct shall have the burden of justifying such departure in any disciplinary hearing.
Joseph Vazquez is a fashion designer who immigrated to the United States. The fashion industry is extremely competitive, but after long years of work, Joseph becomes a celebrated designer with very high income. Which element does NOT attest to his being an EC professional?
Obligation to society
Which of the following statements regarding professionalism is INCORRECT?
One way that professionals are commonly defined is by the level of compensation.
Failure to exercise the degree of care a reasonable person would exercise under the same circumstances.
Ordinary negligence
Which part of the AICPA Code of Conduct would be best suited to the ethical dilemmas of a CPA?
Part 1: Members in Public Practice
Adequately plan and supervise the performance of professional services.
Planning and supervision
Anyone identified to the auditor by name prior to the audit who is a recipient of the auditor's report.
Primary beneficiary
Which is the likely reason that rules of conduct were created for financial and accounting professionals?
Principles were too broad and couldn't be enforced.
A contractual relationship that exists between two or more contracting parties.
Privity of contract
Defendants who are not found to have "knowingly committed a violation" of the securities law are liable based on the defendant's percentage of responsibility.
Proportionate liability
The auditor either had actual knowledge of the falsity of the representation, or had a reckless disregard for the truth or falsity of the representation.
Scienter
Law established by state and federal legislative bodies that specifically addresses the auditor's liability under certain circumstances.
Statutory law
Obtain sufficient relevant data to afford a reasonable basis for conclusion or recommendation in relation to any professional services performed.
Sufficient relevant data
Which of the following statements regarding the AICPA Code of Professional Conduct is INCORRECT?
The Code provides guidance only to members in public practice with respect to performance of their professional responsibilities.
Tenisha Robertson has audited Live Long Supplements Corp., a public company, for the past two years. If Tenisha agrees to also perform bookkeeping services for Live Long, under which law is she liable?
The Sarbanes-Oxley Act of 2002
If a stockholder sues a CPA for common law fraud based on false statements contained in the financial statements audited by the CPA, which of the following is the CPA's best defense?
The auditor followed GAAS.
When a plaintiff is suing the auditor for damages under Rule 10(b)-5 of the 1934 Securities Act, which of the following is not part of the plaintiff's burden of proof?
The auditor was negligent.
Which of the following statements regarding confidential information is INCORRECT?
The rule on confidential client information does not allow a CPA to comply with a validly issued and enforceable subpoena or summons.
Which of the following statements regarding subordination of judgment is INCORRECT?
The subordination of judgment threat is at an unacceptable level if the CPA concludes the position taken by the firm does not result in a material misrepresentation of fact or a violation of applicable standards, laws, or regulations.
Marcella Armsburg, CPA, has been offered a fee from her client to be paid only if Marcella is able to get a city penalty waived. Which of the following is true?
This is prohibited if the client is an attest client.
Sorboni Dhillon is a CPA in public practice, performing only non-attest services for her clients. The general standards of the AICPA code of professional conduct apply to Sorboni.
True
All of the following are cases related to criminal liability for auditors EXCEPT
Ultramares Corp. v. Touche (1931).
During the audit of CleanCorp, the CPA received an indication from CleanCorp's management that they will dismiss the firm if they do not agree with CleanCorp's aggressive position on revenue recognition. Which threat does this relate to?
Undue influence
You are a CPA on an audit engagement for Spotway Manufacturing. You are approached by the client who tries to pressure you to drop your request to adjust revenues. Which of the following is the threat this represents to auditor independence?
Undue influence threat
A CPA who is a "covered person" purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA's minor child. The trust securities were not material to the CPA but were material to the child's personal net worth. Would the independence of the CPA be considered impaired with respect to the client?
Yes, because the stock would be considered a direct financial interest and, consequently, materiality is not a factor.
A CPA would violate the AICPA rule on integrity and objectivity if:
a CPA in industry knowingly misrepresented the earnings of the company he worked for. a CPA in public practice represented both the buyer and seller in helping the parties negotiate the sale (purchase) of a business. a CPA who was an audit staff member subordinated his or her judgment to that of the audit partner.
A/an _______ threat arises if entering into a contingent fee arrangement or accepting a commission or a referral fee associated with an attest client impairs independence.
advocacy
All of the following are examples of activities that can impair a CPA's appearance of independence, EXCEPT
an auditor's spouse is employed by a consulting client.
A binding agreement is not honored by one or more parties to a contract.
breach of contract
A covered member's parents, nondependent children, brothers and sisters, or stepbrothers or stepsisters.
close relative
A person in a position to potentially influence attest decisions or the outcome of an attest engagement.
covered member
Subjects auditors to penalties of fines or imprisonment or both; the only entities that can bring charges for criminal causes of action are federal or state governments.
criminal liabilitly
Exercising due professional care expected of other CPAs in the performance of professional services.
due professional care
The firm of Schultz and Gleason takes on the audit of Bagel Bakers, in which they do not properly follow GAAS, despite having the qualifications and training necessary to complete the audit. This is most likely a violation of
due professional care.
Starr Corp. approved a plan of merger with Silo Corp. One of the determining factors in approving the merger was the strong financial statements of Silo, which were audited by Cox & Co., CPAs. Starr had engaged Cox to audit Silo's financial statements. While performing the audit, Cox failed to discover material fraud, which subsequently caused Starr to suffer substantial losses. For Cox to be liable under common law under the Ultramares decision, Starr, at a minimum, must prove that Cox:
failed to exercise due care.
A CPA has a long-standing or close relationship with a client and the CPA is too sympathetic or accepting of the client's work. The Conceptual Framework would categorize this as a _______ threat.
familiarity
During the audit of Knight Alloys, the manager of the auditing team accepted a position as Controller of Knight Alloys. This is an example of
familiarity threat.
Individuals or entities who the auditor either knew, or should have known, would rely on the audit report.
foreseeable parties
A limited class of third parties known to be relying on the financial statements.
foreseen class
An intentional act through the use of deception that results in a misstatement in financial statements that are the subject of an audit.
fraud
Failure to use even slight care in the circumstances.
gross negligence
When a breach of contract occurs, the client usually seeks one or more of the following remedies EXCEPT
incarceration for reckless disregard for the truth.
Acting with integrity and objectivity, being honest, and not subordinating the public trust to personal gain and advantages.
independent in fact
A position with an attest client where an individual can exercise influence over the financial statements.
key position
The essence of the due care standard is that the auditor should not be guilty of:
negligence.
Unnamed third parties, such as creditors, stockholders, and potential investors, who use the auditor's report.
other benefecaires
Express the basic tenets of ethical conduct and provide the framework for the rules that govern the performance of the member's professional responsibilities.
principles
The firm of Schultz and Gleason takes on the audit of Bagel Bakers, which they cannot reasonably expect to complete with their skill level. This is most likely a violation of
professional competence.
Undertaking only those professional services that a CPA or a CPA's firm can reasonably expect to complete with professional competence.
professional completence
Interpretations contained within the AICPA Code of Professional Conduct
provide additional guidance regarding the scope and applicability of the rules of conduct.
Establish minimum standards of acceptable conduct in the performance of professional services.
rules of conduct
The threat that a CPA could benefit, financially or otherwise, from an interest in, or a relationship with, a client or persons associated with the client
self interest threat
The threat that a CPA will not appropriately evaluate the results of a previous judgment made by, or service performed by, an individual in the member's firm, and that the CPA will rely on that work in forming a judgment as part of an engagement.
self review threat
A CPA who concludes that difference of opinion may result in material misrepresentation of fact should discuss these concerns with the
supervisor
All of the following statements about the Foreign Corrupt Practices Act (FCPA) are correct EXCEPT
the FCPA does not apply to the work of auditors when an integrated audit reports on internal control over financial reporting.
A key aspect of the "concern for the public interest" definition of a professional is:
the fact that there are situations where professionals must put the interest of society ahead of the interest of their clients or their own well-being.
In the conceptual framework to the AICPA Code of Professional Conduct, a self-interest threat is:
the threat that a CPA could benefit, financially or otherwise, from an interest in, or a relationship with, a client or persons associated with the client.
One of the elements necessary to recover damages if there has been a material misstatement in a registration statement filed pursuant to the Securities Act of 1933 is that:
there was a material false or misleading statement in the financial statements.
An individual or collective group who is not in privity with the parties to a contract.
third party
A wrongful act that injures another person's property, body, or reputation.
tort
The threat that a CPA will subordinate his or her judgment to an individual associated with a client or any relevant third party due to that individual's reputation or expertise, aggressive or dominant personality, or attempts to coerce or exercise excessive influence over the CPA.
under influence threat
Robert Gutierrez is a CPA at a mid-size firm in Atlanta. Under which of the following circumstances may Robert not disclose confidential client information?
when a client's banker has requested information about his client.