Final: Chapter 3 Professional Ethics
contingent
A CPA may redesign a client's payroll system and charge a fee calculated at 25% of the next four years' cost savings, which is called a(n) _________________ fee.
(1) has a material indirect interest in the shares of stock of an attest client (2) owns shares f stock in the attest client
A covered member's independence is impaired when the covered member:
Indirect financial interest
A financial interest owned through an intermediary (e.g., a mutual fund) when the CPA neither controls the intermediary nor has the authority to supervise or participate in the intermediary's investment decisions. An example is an investment in a professionally managed mutual fund. The Code of Professional Conduct allows CPA's to have indirect financial interests in attest clients, as long as the investment is not material in relation to the CPA's net worth.
Rules
A group of enforceable ethical standards included in the AICPA Code of Professional Conduct.
Individual in a position to influence the attest engagement
An individual who (1) evaluates the performance or recommends the compensation of the attest engagement partner, (2) directly supervises or manages the attest engagement partner, including all successively senior levels above that individual through the firm's chief executive, (3) consults with the attest engagement team regarding technical or industry-specific issues related to the attest engagement, or (4) participates in or oversees at all successively senior levels quality control activities, including internal monitoring, with respect to the specific attest engagement.
Financial interest
An ownership interest in an equity or a debt security issued by an entity, including the rights and obligations to acquire such an interest and derivatives directly related to such interest. See also direct financial interest and indirect financial interest.
(1) other attestation and assurance services (2) audit services only
CPA firm independence from a client is required when providing:
do not engage the firm to perform an audit or review
CPA firms are allowed to perform services for a contingent fee for clients that:
false
CPA firms are allowed to use fictitious names as long as they are not _______________, misleading, or deceptive.
(1) sole practitioners (2) partnerships (3) professional corporations (4) limited liability partnerships
CPA firms may perform attest services as:
(1) a review (2) an examination of prospective financial information (3) an audit
CPA's are not allowed to receive a contingent fee for performing services for a client that also engages the CPA to perform:
general
CPA's are required to perform all CPA services with competence and professional care under the ____________ standards rule.
Professional Ethics Division of the AICPA
Complaints about a CPA's conduct with national interest are first referred to the:
Attest engagement team
Consists of individuals participating in the attest engagement, including those who perform concurring and second partner reviews. The attest engagement team includes all employees and contractors retained by the firm who participate in the attest engagement, irrespective of their functional classification (for example, audit, tax, or management consulting services), except specialists as discussed in the professional standards and individuals who perform only routine clerical functions, such as word processing and photocopying.
independence
Due to a CPA's responsibility to serve the public, ____________ is perhaps the most important concept in the AICPA Code of Professional Conduct.
independence
Due to the CPA's responsibility to serve the public, _____________ is perhaps the most important concept in the AICPA Code of Professional Conduct.
moral ; values
Ethics has been defined as the study of _____________ principles and ____________ that govern the actions and decisions of an individual or group.
(1) signing a document containing materially false and misleading information (2) failing to correct financial statements that are misleading (3) making materially incorrect entries in a client's financial statements or records
Examples of acts discreditable include:
(1) spouse (2) spousal equivalent (3) dependents
For independence concerns, immediate family members under the same restrictions as the covered member include:
Interpretations
Guidelines issued by the AICPA for the scope and application of the Rules of Conduct.
the CPA must have knowledge of the stock investment
If a CPA's father owns a material amount of stock in an attest client, which of the following factors is also needed to impair a covered member's firm independence?
is also impaired
If a covered member's independence is impaired, a firm's independence:
not independent (this conflicts with the previous answer, go figure)
If a partner of the CPA firm is also an officer of a client, the CPA firm is:
(1) no accounting standards that specifically apply to the situation (2) conflicts between an individual's self-interest with his or her ethical beliefs (3) gray areas with no obvious answers
In many ethical dilemmas faced by professional accountants, there are:
rules
In the AICPA Code of Professional Conduct, ___________ are the requirements that are enforceable under the AICPA bylaws.
Independence
Independence includes two concepts -- Independence of mind and independence of appearance.
(1) the ability to exercise significant influence over the client (2) a material financial interest the auditor has knowledge of
Independence is impaired in regards to a client if a close relative has:
GAO
Independence requirements for audits of entities that receive federal financial assistance are developed by the:
mind; appearance
It is critically important that accountants who perform attestation services have independence of both ___________ and __________.
not impaired as long as John does not work on the audit.
John Jones, CPA is a partner in a local firm. His wife works as an administrative assistant for one of the firm's audit clients and holds an immaterial investment in the company's stock through an employee benefit plan. The firm's independence is:
an indirect
Jones, CPA has an investment in a mutual fund whose investments include stock in ABC Company. If ABC Company is attest client of the firm Jones works for, Jones' investment is _________________ financial interest.
Independence
Members in business are least concerned about which rule of the Code of Professional Conduct?:
This is a direct financial interest that impairs Jones' independence.
Mr. Jones, CPA has a 20 year old son in college who is still his dependent. The son just purchased 10 shares of stock in a company Jones audits. Which of the following statements is correct?
audit committee
NYSE, ASE, and NASDAQ all require listed companies to establish a(n) ________________ _______________ that consists of at least three independent and financially literate individuals and that increases the auditors' ability to deal independently with management.
client management is required to notify the SEC and copy the auditor
Once an illegal act has been reported by the auditors to the Board of Directors:
(1) Independence for CPA's in public practice (2) Overall for CPA's in public practice (3) Overall for CPA's in business
The Code of Professional Conduct includes the following conceptual frameworks for situations not explicitly addressed by the Code of Professional Conduct.
independent
The Code of Professional Conduct requires CPA's to be _____________ from a client when providing audit or attestation services.
(1) Details of discussion with third parties (2) Decisions made (3) The parties with whom the issue was discussed (4) The substance of the conflict
The Code of Professional Conduct suggests CPA's facing ethical conflicts should document:
(1) established internal procedures (2) ethical issues involved
The Code of Professional Conduct suggests during ethical conflicts, CPA's should consider:
Audit
The Code of Professional Conducts requires CPA's in public practice to be independent when performing which of the following services?
ethics
The IIA Code of ____________ is organized with an introduction, Fundamental Principles, and a Code of Conduct.
(1) financial information systems design and implementation (2) bookkeeping or accounting services (3) internal audit outsourcing services
The Sarbanes-Oxley Act of 2002 makes it unlawful for a registered public accounting firm that audits a public company to provide ___________ to that client.
Independence of appearance
The avoidance of circumstances that would cause a reasonable and informed third party, having knowledge of all relevant information, including safeguards applied, to reasonably conclude that the integrity, objectivity, or professional skepticism of a firm or a member of the attest engagement team has been compromised.
confidential
The communication between CPA's and their clients are ______________ but not privileged under common law.
(1) members in public practice (2) members in business
The conceptual Frameworks section of the AICPA Code of Professional Conduct is applicable to:
(1) prevents release of information whose disclosure could financially injure the client (2) prevents the CPA from leaking information that could profit the CPA.
The confidential relationship between the CPA and the client:
preface
The fact that rules of conduct apply to all professional services performed except when otherwise stated is made clear in the ____________ section of the AICPA Code of Professional Conduct.
(1) planning and supervision (2) due professional care (3) professional competence
The general standards rule requires compliance:
all CPA services
The general standards rule requiring professional competence and due professional care applies to:
professional conduct
The members of the public accounting profession developed a code of __________________ _______________ to guide individuals in maintaining a professional attitude and provide assurance of high standards to the public.
Principles
The part of the AICPA Code of Professional Conduct that expresses the profession's responsibilities to the public, clients, and colleagues and provides a framework for the rules.
(1) integrity and objectivity (2) accounting principles
The relevant rules of members in practice and members in business include
Independence of mind
The state of mind that permits the performance of an attest service without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity and exercise objectivity and professional skepticism.
integrity and objectivity
This rule states that a CPA must not misrepresent facts or subordinate judgments when performing professional services.
False
True or False: A CPA firm that performs an audit or review for a client can recommend a product for the client and receive a commission as long as the fact is disclosed to the client.
FALSE Accounting firm independence is considered separately from independence of individuals
True or False: If a partner in a CPA firm lacks independence with respect to a client engagement, the firm loses its independence with respect to that engagement.
True
True or False: When performing tax engagements for a client, CPA's have a responsibility to both the client and the public.
confidential but not privileged
Under common law, CPA's may be compelled to disclose their communication with clients because they are:
(1) AICPA membership may be suspended for up to two years (2) permanent expulsion from the AICPA may occur
When a CPA is found guilty of a professional ethics violation:
independence
When a covered member is offered employment with an audit client, the CPA firm should remove the CPA from all engagements for that client because it may affect ___________.
alternative practice
When a publicly traded company purchases a public accounting firm, the organization structure is referred to as a(n) ___________________ __________________ structure.
(1) the failure to take remedial action is expected to lead to auditor resignation (2) senior management and the Board of Directors do not take appropriate remedial action
Auditors are required to report illegal acts when:
(A) PCAOB (B) AICPA Auditing Standards Board (C) AICPA Accounting and Review Services Committee (D) FASB
(A) Auditing and attestation standards for public companies (B) Auditing and attestation standards for nonpublic companies (C) Compilations, reviews, and attestation standards for services related to unaudited information of nonpublic companies (D) Accounting standards for nongovernmental entities.
(A) FASB (B) GASB (C) FASAB (D) IASB
(A) for nongovernmental entities (B) for state and local governmental entities (C) for federal governmental entities (D) for international financial accounting and reporting principles
(A) direct financial interest (B) indirect financial interest (C) financial interest
(A) owning capital stock in a client (B) owning shares of a mutual fund that owns shares of stock in a client (C) owning equity or debt security in a client directly or indirectly
All of the following: (1) Individual accountant (2) public accounting firm (3) both an individual accounting and the public accounting firm EXCEPT: (4) the AICPA (lol because they're not even an accounting firm, so EVERYONE)
All of the following may lack independence with respect to a client or a potential client except:
in public practice
All rules of the AICPA Code of Professional Condct apply to CPA's:
public practice
All rules of the AICPA Code of Professional Conduct must be followed by CPA's in ____________ ___________, but some of the rules do not apply for CPA's in business, retired and unemployed.
Ethical dilemma
Also referred to as a moral dilemma or ethical conflict, it is a situation in which there is a choice to be made between two options, neither of which resolves the situation in an ethically acceptable fashion. To follow one option makes it impossible to follow the other option.
Ethical conflict
An ethical dilemma. As defined in the AICPA Code of Professional Conduct, a situation in which an individual encounters obstacles in deciding an appropriate course of action due to internal or ethical pressures or when conflicts exist in applying relevant professional standards, to legal standards, or both.
Period of the professional engagement
A period that begins when a member either signs an initial engagement letter or other agreement to perform attest services or begins to perform an attest engagement for a client, whichever is earlier. The period lasts for the entire duration of the professional relationship (which could over many periods) and ends with the formal or informal notification, by either the member or the client, of the termination of the professional relationship or by the issuance of a report, whichever is later. Accordingly, the period does not end with the issuance of a report and recommence with the beginning of the following year's attest engagement.
Direct financial interest
A personal investment under the direct control of the investor. The Code of Professional Conduct prohibits CPAs from having any direct financial interests in their attest clients. Investments made by a CPA's spouse or dependents also are regarded as direct financial interests of the CPA.
Manager
A professional employee of the public accounting firm who has continuing responsibility for the planning and supervision of engagements for specified clients.
Partner equivalent
A professional employee who is not a partner of the firm but who has the ultimate responsibility for an attest engagement or has the authority to bind the CPA firm to conduct an attest engagement without partner approval. For example, assume a CPA firm employee is a manager who functions as a partner in that she has ultimate responsibility for several engagements -- this employee is a partner equivalent.
independence
A public accounting firm's ____________ is impaired if a group of partners and staff that are not covered members together own more than 5% of an attest client's outstanding equity securities.
one year
A public accounting firm's independence is considered impaired if fees for professional services rendered more than ________ prior to the audit report date for the current year's audit has not been collected before the issuance of the current year CPA report.
Acceptable level of risk of noncompliance
A situation in which a reasonable and informed third party who is aware of the relevant information would be expected to conclude that a member's ability to comply with the rules is not compromised. For independence, this is referred to as the acceptable level of risk to independence.
Immediate family member
A spouse, spousal equivalent, or dependent (whether or not related).
a reasonable and informed third party
A threat is at an acceptable level of risk of noncompliance when ____________ would conclude the threat does not compromise compliance with the Code.
(1) types of services offered (2) certifications of members (3) fees charged for services (4) degrees of members
Acceptable forms of advertising include:
members in public practice only
All of the Rules of Conduct section of the AICPA Code of Professional Conduct is applicable to:
all of the following: (1) created by the profession, legislation, or regulation (2) implemented by the CPA firm (3) implemented by the attest client EXCEPT: required by financial institutions
All of the following are categories of safeguards that mitigate or eliminate threats to noncompliance EXCEPT those:
All of these: (1) Due care (2) Integrity (3) Scope and nature of services EXCEPT: (4) Rules
All of the following are principles of the AICPA Code of Professional Conduct EXCEPT:
safeguards
Controls that mitigate or eliminate threats to independence are called _______________.
conceptual frameworks
The Code of Professional Conduct includes _________________________ ___________________ that address threats to compliance when the Code itself has no specific related guidance.
preface
Recent changes are presented in the _____________ section of the AICPA Code of Professional Conduct.
conflicts
The AICPA Code of Professional Conduct refers to ethical dilemmas as ethical _________.
(1) obligations to their employers (2) objectivity (3) integrity (4) competency
The Code of Conduct in the IIA's Code of Ethics address internal auditor:
the Institute of Internal Auditors (IIA)
The Code of Ethics for internal auditors was developed by:
principles
The Code of Professional Conduct ____________ include responsibilities, public interest, integrity, objectivity and independence, due care, and scope and nature of services.
acceptable level
When a threat exists, a CPA needs to determine whether a(n) _____________ _____________ of risk of noncompliance with the Code of Professional Conduct exists.
Board of Directors
When auditors discover an illegal act that must be reported, the first communication should be to the:
(1) Quantitative factors (2) Qualitative factors (3) Safeguards
When evaluating the significance of a threat, the things that should be considered are:
(1) authorizes a transaction for the client (2) has custody of a client's assets (3) sets policies for the client
When performing nonattest services for an attest client, a CPA's independence can be impaired if the CPA:
(1) The CPA's responsibilities (2) Objectives of the engagement (3) Limitations of the engagement (4) The client's responsibilities (5) The services to be performed.
Which of the following are understandings with clients that CPA's establish and document before performing any nonattest services?
NOT: Select the least costly course of action. But you should: (1) identify the problem (2) identify any constraints relating to the decision (3) select the best course of action
Which of the following is NOT a step involved in making any decision?
Interpretations
Which of the following sections of the AICPA Code of Professional Conduct is applicable to ALL members?
records provided by the client
Which of the following types of information related to the audit must be returned to the client if requested?
True Advice and consulting of clients is allowed by the AICPA's independence rules, so long as the CPA themselves are not making the decisions for the client.
While CPA's may not perform management functions or make any management decisions for their clients, they are allowed to provide advice, research, and recommendations to assist their client decision-making.
credibility
Without public confidence in the attestor, the attest function serves no purpose. Because the need for public confidence is so high, the CPA's product is _______________.
