SmartBook Chapter 4

True or false: SOX prohibits bookkeeping services for audit clients.

True

In which situation would marketing accounting services be considered an act discreditable?

When an accountant claims they are a CPA when they are not

A self-interest threat exists for a CPA in business ______.

When the CPA could benefit from a relationship with the employing organization

Match each type of document prepared by the member/CPA with the correct description.

Work product: Deliverables required by the engagement correct toggle button unavailable Deliverables required by the engagement Working papers: Documents prepared solely for purposes of the engagement Member-prepared records: Records generated by the member in the engagement

When a CPA firm provides professional services related to a particular matter involving two or more clients whose interests differ

a conflict of interest exists.

The SEC was concerned about the relationship between EY and PeopleSoft because

a mutuality of interests in the EY/GEMS partnership a symbiotic relationship existed between EY and PeopleSoft

In July 2015, the SEC's action against Deloitte was due to

a violation of auditor independence rules

PwC took on a Governance, Risk, and Compliance (GRC) consulting engagement for Logitech that resulted in

a violation of independence rules

Hosting services are offered as nonattest services and may include

acting as sole host of a financial information system providing back up services of client records

When a CPA makes a whistleblowing charge against the employer under Sarbanes-Oxley or Dodd-Frank, a(n) ______ threat arises.

adverse interest

In relation to conflicts of interest, a violation of the Integrity and Objectivity Rule exists when the CPA knowingly ______. (Check all that apply)

becomes involved in a conflict of interest with another party directs others to make false and misleading entries in the financial statements certifies false and misleading financial statements

Threats to the independence of CPAs include ______. (Check all that apply)

familiarity threat advocacy threat financial self-interest threat self-review threat

When a CPA owns stock of a client, this may create a ______.

financial self-interest threat

The independence rules apply to close relatives of the CPA who ______. (Check all that apply)

hold a key position with the client that enables them to exercise significant influence over the client. own a financial interest in the client that is material to their net worth and is known by the CPA

When a CPA takes custody of or stores client data and records that are only accessible through the CPA, this is commonly called a(n) ______.

hosting service

The conceptual frameworks in the AICPA Revised Code ______.

incorporate a threats and safeguards approach

PCAOB chairman, James Doty stated that, "The bedrock of audit quality is

independence

The state of mind that permits the performance of an attest service without being influenced in ways that compromise professional judgment is called

independence in fact

The SEC's Operation Broken Gate is an initiative to identify auditors who violate

independence standards

If an accountant, with respect to an audit client, is able to exercise objective and impartial judgment on all issues relative to the engagement, the SEC deems the accountant to be

independent or independence

CPAs should avoid circumstances that might lead informed third-party users to conclude ______.

integrity, objectivity, or professional skepticism has been compromised

When evaluating the risk of material misstatements in financial statements, professional _____ is imperative for accountants

judgment

An ethical conflict occurs for a CPA in business when

obstacles exist when applying legal standards

In 2014, KPMG settled charges by the SEC for independence violations resulting from

providing corporate finance services to an affiliate of an audit client providing payroll services to affiliates of an audit client providing bookkeeping to affiliates of an audit client

A self-review threat occurs when a CPA

prepares source documents that are used to generate the client's financial statements

Which of the following are components of the KPMG Professional Judgment Framework? (Select all that apply)

Articulate and document rationale. Clarify issues and objectives. Gather and evaluate information. Consider alternatives.

True or false: Immediate family members come under independence rules only if they hold a key position with the client.

False

The spirit of the rules suggests the essence of professionalism is ______.

Follow the letter of the rule Protect the public interest Follow the spirit of the rule

Which of the following are included in the conceptual framework for CPAs in business?

Objectivity Integrity

An ethical conflict occurs for a CPA in business when ______.

Obstacles exist when applying legal standards.

PCAOB Rule 3520 covering Auditor Independence ______.

Requires auditors to maintain independence throughout the audit and professional engagement period

Which rule requires the accounting firm to be independent of the client throughout the professional engagement period?

Rule 3520 Auditor Independence

Which rule applies when a registered public accounting firm is not independent of the client when an aggressive tax position exists?

Rule 3522 Tax Transactions

Applying ethical reasoning to identify shareholder interests and the effect of actions on shareholders is inconsistent with which cognitive judgment trap?

Rush to judgment

Which of the following professional standards must tax accountants adhere to when providing professional services?

SSTS Confidentiality Rule Contingent Fees Rule

When an audit firm relies on financial statements it prepared, this creates which type of threat to independence?

Self-review threat

The AICPA Revised Code links the Integrity and Objectivity Rule to challenges from: (Select all that apply.)

Subordination of judgment Conflict of interest situations

In tax planning matters, a CPA may still recommend a tax position that does not meet the realistic possibility of success standard if ______.

The CPA recommends appropriate disclosure A reasonable basis exists for the position

When a CPA firm seeks audit committee preapproval of nonauditing services related to internal control over financial reporting, ______.

The accounting firm should describe the scope of the service in writing The substance of discussions between audit committee and issuer should be documented The accounting firm should discuss potential effects on independence with the audit committee

A concern of state boards of accountancy about CPA-firm names is that ______.

The firm name may mask the true identity of the firm The firm name may be misleading

KPMG was criminally prosecuted for its role in a tax shelter scandal during 1996 to 2002, because ______.

The firm prepared false documents to deceive regulators about the true nature of the tax shelters

Rule 3523 treats a registered public accounting firm as not independent if ______.

The firm provides tax services to members of management who serve in financial reporting oversight roles

Which of the following tests must be met for a transaction to be identified as having economic substance?

The transaction affects the taxpayer's economic position in a meaningful way, aside from federal income tax effects. The taxpayer has a substantial purpose for engaging in the transaction, aside from federal income tax effects.

If a client refuses to provide consent for a predecessor auditor to discuss confidential client information to the successor auditor, the best response by the successor would be ______.

To be skeptical and concerned about the reasons for denying permission

Since the PCAOB was formed, a mandatory quality inspection program was implemented. What is the average audit deficiency rate range since the program started?

30-40%

The difference between receipt of a contingent fee and a commission or referral fee is that ______.

A commission is typically paid to the CPA for recommending a product of another party to the client A contingent fee is conditioned on the outcome of the service A referral fee is typically paid to the CPA by the client for referring a service of the client to another party

Under Rule 3522 Tax Transactions, an aggressive tax position exists when ______.

A significant purpose of the transaction is tax avoidance

Which of the following relate to the professional standards of a tax accountant?

Act as an advocate for his/her client Exercise due care Act honestly

Which of the following nonattest services are prohibited for attest clients under SOX?

Actuarial services Financial information systems design and installation Internal audit outsourcing services

Member (CPA)-prepared records include ______.

Adjusting, closing, combining, or consolidated journal entries

Which of the following is considered an act discreditable?

Advertising misleading accreditation.

Under Rule 1.510.001, a CPA is prohibited from receiving a contingent fee from a client when also performing which of the following?

An audit or review of financial statements An examination of prospective financial information A compilation of financial statements when there is third-party reliance and the lack of independence is not disclosed

In developing a tax return position, a CPA should ______.

Apply the realistic possibility of success standard

Which of the following nonattest service is prohibited for attest clients?

Appraisal or valuation services

Examples of member's working papers include ______. (Check all that apply)

Audit programs Statistical sampling analyses Analytical review schedules

The SEC investigated Thomas Avent because

Avent leaked proprietary information to his stock broker

Prior to concluding whether a tax position is appropriate, the CPA should ______.

Become knowledgeable of all the material facts related to the position.

Which of the following lead to loss of public trust in the accounting profession? (Select all that apply)

Biased decision making Subordination of judgment Taking shortcuts

Which of the following are ways the SEC emphasizes independence? (Select all that apply)

By prohibiting certain business relationships with the audit client. By restricting certain nonauditing services to audit clients By imposing a general standard of independence on auditors

Changes in the form of professional accounting organizations and the name rule in recent years include which of the following?

CPAs only need to own a majority of the equity interests in the firm. CPAs can practice in alternative practice structures.

The General Standards Rule calls for ______.

Competence Due care

Which of the following are appropriate processes for a CPA in business to resolve an ethical conflict?

Consider whether to remain with the employer. Consult with legal counsel.

Which of the following are appropriate processes for a CPA in business to resolve an ethical conflict?

Consider whether to remain with the employer. Consult with legal counsel.

Under Rule 3524, which of the following requirements exist for a firm that seeks audit committee preapproval to perform permissible tax services for the audit client?

Describe in writing the scope of the services and fee structure for the engagement. Document the substance of the discussions with the audit committee. Discuss with the audit committee the potential effects of the services on audit independence.

In tax shelter cases, the courts rely heavily on the _________ ___________ doctrine.

Economic Substance

COSO examined the role of which of the following elements in the internal control environment?

Effective internal audit functions Tone at the top Independent audit committee

During the period of an attest engagement, a CPA can perform nonattest services for an audit client without impairing independence when the client does which of the following?

Evaluates the adequacy and results of the services performed Makes all management decisions and performs all management functions Designates an individual with the necessary abilities to oversee the services

CPAs may be exposed to disciplinary action when engaged in which of the following acts discreditable?

Failure to file personal tax returns or pay tax liability Negligence in the preparation of financial statements or records Failure to follow all relevant rules and regulations pertaining to government audits

CPAs may be exposed to disciplinary action when engaged in which of the following acts discreditable?

Failure to follow all relevant rules and regulations pertaining to government audits Failure to file personal tax returns or pay tax liability Negligence in the preparation of financial statements or records

How individuals should bring their concerns to superiors within the organization and how possible objections can effectively be counteracted are addressed by the

Giving Voice to Values methodology

How individuals should bring their concerns to superiors within the organization and how possible objections can effectively be counteracted are addressed by the ______.

Giving Voice to Values methodology

Under the competence standards for CPAs in professional practice, when a CPA prepares financial statements for an organization that he is a shareholder of, the CPA ______.

Has a responsibility to disclose the relationship.

State board rules of accounting prohibit the use of a firm name that ______.

Implies unjustified services Is misleading Is deceptive

The acceptance of a contingent fee for professional services when also preparing attest-related services for a client is prohibited because ______.

It is a violation of independence

Which of the following influence the professional judgment of accountants? (Select all that apply)

Knowledge of the accounting issues Personal behavioral traits Personal values

The SEC investigated Scott London's dealings with Brian Shaw because

London leaked confidential information of two KPMG clients to Shaw London benefited financially from his leak of confidential information to Shaw

The two broad conceptual frameworks in the AICPA Revised Code apply to which of the following? (Select all that apply)

Members in public practice CPAs in business

Which of the following are sections in the AICPA Revised Code of Professional Conduct? (Select all that apply

Members in public practice Members in business

Historically, the SEC allowed the accounting profession to police itself through which process?

Peer review

Under Rule 3521 Contingent Fees, independence is considered to be impaired when a registered public accounting firm performs an audit and ______.

Provides any service or product to the client for a contingent fee Provides any service or product to the client for a commission Receives from the client a contingent fee or commission

The good-faith belief standard for tax positions requires that it have at least a(n) ___________ possibility of success if challenged in an administrative or judicial proceeding on its merits. (Enter one word per blank)

Realistic

Which of the following are examples of potential conflicts of interest?

Referring clients to other service providers who refer clients to the CPA in an exclusive arrangement. A CPA accepting gifts from a client. Providing relevant information to two clients who are in competition to acquire the same company.

The elements of a tax return position include which of the following?

Reflected on a tax return on which the CPA has specifically advised a taxpayer Position about which a CPA has knowledge of all material facts

Safeguards that might eliminate or reduce threats to independence include those

created by the profession implemented by the firm created by legislation implemented by the attest client

A situation may cause the SEC to determine that auditor independence is impaired when the situation ______. (Check all that apply)

creates a mutual or conflicting interest between the CPA and the audit client places the accountant in the position of auditing his own work results in the accountant acting as management or an employee of the audit client places the accountant in a position of being an advocate for the client

When KPMG provided bookkeeping and payroll services to an audit client, they created a(n)

self-review threat

The AICPA Revised Code of conduct includes material for CPAs in business to evaluate the relationship between the CPA and their employer and any potential threats to

the Integrity and Objectivity Rule

PwC was not independent from Logitech because

they provided prohibited consulting services

All of the following are fundamental principles of professional ethics identified by the IESBA, except

transparency

A self-interest threat exists for a CPA in business

when the CPA could benefit from a relationship with the employing organization

A conflict of interest threatens the Integrity and Objectivity Rule

when the interests of the CPA with respect to a certain matter differ from the interest of the client related to the matter